Monday, March 31, 2014

US corporations exposure in developing countries

U.S. corporations, however, have considerable exposure to developing economies. In 2011, 34 percent of sales by U.S. multinationals’ majority-owned foreign affiliates were in emerging markets, up from 25 percent in 2000. 

Emerging markets figure even more prominently in U.S. companies' overseas expansion plans. In 2011, developing countries accounted for 42 percent of capital spending by those affiliates, compared with 30 percent in 2000.

Friday, March 28, 2014

Emerging economies have to fix their own problems

The agonizing reappraisal of emerging economies by investors started with the Federal Reserve’s taper talk last May and June. Emerging-market officials never thanked the Fed for creating all those inflows of easy money, but now they blame the U.S. central bank for outflows. To be sure, the human tendency is to blame outsiders for self-inflicted woes.

The Fed, however, shows no intention of bailing these countries out. In 2011, Chairman Ben S. Bernanke said, “It’s really up to emerging markets to find appropriate tools to balance their own growth.” And in response to the current emerging-market crisis, Fed Chair Janet Yellen told Congress in February that those problems didn’t currently pose a threat to the U.S. recovery, signaling no change in the Fed’s tapering policy.

Thursday, March 27, 2014

Weak Import demand remains a problem

Falling currencies increase the cost of servicing foreign debt and trigger inflation as import prices leap. Weaker currencies should also aid exports by making them cheaper, but the question remains: Export to whom?

European and North American imports are subdued, while slowing growth in manufacturing-driven China makes that market tough for competitors and materials suppliers. Troubles in emerging economies, which account for 50 percent of worldwide GDP, may prove contagious.

Wednesday, March 26, 2014

People are forgetting what happened

You have Fed tapering and problems with the emerging markets—we’re really in a world where people are either forgetting reality or they are correctly anticipating that these problems really don’t matter and that the economy is, for the first time in years, actually going to grow more rapidly.

Tuesday, March 25, 2014

Play it defensively

You’ve got stocks that are really not supported by fundamentals and...with the uncertainty over Obamacare, with concern about minimum wage and income polarization. I play it defensively.

Monday, March 24, 2014

Emerging economies depend on Developed countries

Since the start of 2014, investors have fretted over emerging markets. And they should. Early in this economic recovery, investors repelled by low returns in the developed world leaped for the stocks and bonds of emerging markets, whose markets promised faster growth.

In 2009 and 2010, emerging economies grew much faster than the U.S. did; stock prices rose 46 percent annually, more than twice the gains of U.S. equities. Hot money flowed in, but so did foreign direct investment, which is harder to extract. Last year, foreign direct investment in the developing world grew 6 percent, to a record $759 billion, or 52 percent of the global total.

In their indiscriminate rush into emerging markets, though, investors forgot two important points: First, without exception, these economies depend primarily on exports for growth, which means the developed economies, especially the U.S., must be capable of buying their goods. And second, not all emerging markets are alike.

Friday, March 21, 2014

Protectionism and competitive devaluations are a worry

The increase in protectionism, perhaps in the form of competitive devaluations, also is a worry. Japan has already embarked on this course and, as discussed previously, South Korea could retaliate as the two nations compete to sell autos, consumer electronics and other products amid sluggish global demand.

Thursday, March 20, 2014

Risk off investments

A major shock would increase the appeal of familiar “risk-off” investments. Investors would rush to Treasury bonds, high-quality corporate debt and the dollar as havens while dumping stocks and commodities. Some niche investments -- such as small luxury goods and medical office buildings -- also would look good.

There is a long list of unattractive investment areas in a “risk-off” environment that includes developed- as well as emerging-market stocks and bonds. 

Wednesday, March 19, 2014

Gary Shilling: US vs China bailouts similarities

A cautionary tale emerges from the recently released transcripts of Federal Reserve policy meetings at the height of the 2008 financial crisis. They show that, like China today, the Fed had all the money it needed to bail out any financial institution, yet central bankers admitted they were “behind the curve” and failed to move swiftly before runs on banks, notably Bear Stearns Cos. LLC and Lehman Brothers Holdings Inc. 

Could China be facing a similar situation -- plenty of bailout ammunition, ample willingness to use it, but tardy in its decision to step in? A financial crisis in the world’s second-largest economy would have global consequences.

Tuesday, March 18, 2014

What market risks to watch for currently

Investors also should keep a close watch on emerging markets, where the threat of contagion is real, as was demonstrated in January with a worldwide flight from risk because of financial, currency and political uncertainty in Ukraine, Turkey, South Africa, India and Argentina.

A financial crisis in China could be another reason for the market to change direction. Even after the recent surge in local government debt, China's total government debt is a modest 53 percent of gross domestic product. Still, the central bank’s efforts to contain the explosive growth of the shadow-banking system may not work. The leap in short-term rates to 30 percent in June could be a warning sign.

Monday, March 17, 2014

US stocks heading to a blow off top

U.S. stocks may be headed for a blow-off as individual investors pile into the market after last year's meteoric increase. Peaks often are reached when everyone has been sucked in. Then, a major shock could force investors to focus on the slow global economy. 

With U.S. growth of only about 2 percent, it won’t take much of a jolt to precipitate another recession, which is long overdue by historical standards.

The investment climate would then shift from “risk on” to “risk off.”

Sunday, March 16, 2014

Chinese government likes to be in control

Chinese leaders are control freaks. Every January they tend to have negative exports because of the Lunar New Year, but this was more so than usual.

Thursday, March 6, 2014

More Government regulation leads to inflation

In reaction to the financial collapse, Wall Street’s misdeeds and the worst recession since the 1930's, substantial increases in government regulation and involvement in the economy are certain -- and therefore, so is more inflation by fiat.


Monday, March 3, 2014

Inflation and Deflation cycles

The long bull market that began in the 1980's was followed by two bouts of financial deflation, in 2000-2002 and 2007-2009, as stocks declined by more than 40 percent for only the fourth and fifth times since 1900. 

A financial inflation/deflation cycle has also occurred among financial institutions that greatly leveraged their balance sheets over the past three decades and are now being forced to raise capital, while reducing risk and leverage.