Monday, June 30, 2014

Gary Shilling interview with Forbes [VIDEO]

Listen to Gary's interview from Feb 2013. 

Wednesday, June 25, 2014

Gary Shilling has a good track record of spotting bubbles

"Spotting bubbles is one of the things I specialize in—something that very few people can do well. I look for situations that are clearly out of line, ride up with the bubble, and then get out of the way before it breaks. In fact, you could say I've made a career out of seeing things that no one else sees before they happen. And this goes way back."

Thursday, June 19, 2014

Gary Shilling: Could China real estate cause huge losses to investors

Real estate has been an investment darling since 2009, when China countered the global recession with massive bank lending. Thrifty Chinese households save almost 30 percent of their incomes and have few other investment opportunities. Stocks continue to slide with the Shanghai Composite Index off 67 percent from its October 2007 peak. Government regulation prevents the widespread movement of investment funds abroad. Government-controlled bank deposit rates pay a trivial 0.35 percent, well below the 2.4 percent inflation rate.

So beyond the shadow banks, real estate has been the star -- much to the displeasure of Chinese leaders, who hate the related speculation. Government attempts to curb the earlier leap in real estate prices by limiting multiple apartment ownership and restricting financial leverage may finally be working.

Prices for new real estate in major cities such as Beijing, Shanghai, Shenzhen and Guangdong leaped 45 percent between February 2012 and this February, but then fell 7 percent through April. 

Given the ghost cities and other measures of extreme overbuilding, the recent slide in real estate values could evolve into a rout, with considerable loss of Chinese wealth and financial institutional failures.

Tuesday, June 17, 2014

Chinese Yuan drop maybe a dangerous sign

Chinese leaders have an easier time controlling their currency than their corruption. The government has alternated between pegging the yuan to the dollar and allowing it to move up or down in tightly controlled bands. Some say the huge devaluation of January 1994, in which the yuan moved from 5.8 to the dollar to 8.7, laid the groundwork for the collapse of other Asian currencies five years later.

The yuan was repegged in May 1995 at 8.32 to the dollar. But under immense pressure from Washington, which claimed China was purposely undervaluing its currency to increase exports, the yuan was allowed to reach 6.83 to the dollar in July 2008. The recession brought another peg that lasted until June 2010. From that time until early this year, the yuan has appreciated an average of 2.5 percent annually, with low volatility.

That, of course, has attracted a huge number of speculators who see the yuan's appreciation as a safe, one-way bet to leverage to the hilt. Such strong demand has kept the yuan trading close to the 1 percent limit above the rate that the central bank sets daily.

The profit opportunity has even encouraged speculators to smuggle money into China. Some Chinese exporters, for example, inflate their invoices. That allows more dollars to be remitted to China than the goods are worth. Similarly, some Chinese companies borrow yuan to finance exports. Then they send the exported goods back to China, where the imports are paid for in dollars. They repeat the process to generate even more dollars.

Moving goods in and out of the Shenzhen special trade zone also provides a means to ship dollars into China to speculate on anticipated yuan appreciation. Investment products sold to Chinese exporters to hedge against the dollar are also used for yuan speculation.

Chinese foreign currency reserves leaped $510 billion last year to $3.8 trillion, suggesting money came in through illegitimate channels. About $150 billion of $244 billion in capital inflows was hot money. In January, $73 billion flooded in -- the biggest monthly inflow in a year.

Chinese leaders are clearly unhappy with the one-way bet they are providing to speculators as they also seek to curtail excess liquidity. So in late February, the People’s Bank of China, the nonindependent central bank, engineered an unexpected drop in the yuan by buying dollars and selling yuan. Sure, this fits in with China’s long-run plans to free the yuan and make it an international currency. And China did increase the trading band from 0.5 percent to 1 percent. A weaker yuan, furthermore, helps Chinese exports. But the timing implies this policy reversal was a blatant attempt to punish speculators.

The effects were swift and significant. Global trading in the yuan dropped 8.5 percent in February from January, pushing it from the seventh to the eighth most-used currency.

The Chinese government, which doesn’t want to push the currency into free-fall, is playing a dangerous game. A weaker yuan revives criticism from the U.S. and others that China is a currency manipulator. And further weakness could cause foreign capital to flee China in anticipation of even more declines. Besides, dollar-buying only adds to China's embarrassing horde of foreign currency.

Nevertheless, as we know from repeated historical examples, runs on currencies are difficult to stop. Chinese leaders, in their zeal to punish speculators and assert control, may have erred. 

Monday, June 16, 2014

Gary Shilling on why he thinks China could be in for trouble

China could successfully increase economic growth, transition smoothly to a domestic-driven economy, control its rising militarism, reduce corruption without major disruptions, cease manipulating the yuan, lower the risks in shadow banks without clumsy bailouts, slowly let the air out of the real-estate bubble and deregulate interest rates. 

Given the history of other countries with similar problems, I wouldn’t bet on it.

Thursday, June 12, 2014

Aussie Dollar and Canadian Dollars at risk from China

The currencies of weak emerging economies that depend on commodity exports for growth will suffer if China has major financial and economic woes. 

Developed countries' currencies, such as the Australian and Canadian dollars, are also vulnerable to declining commodity demand, which could result if China has financial troubles.

Wednesday, June 11, 2014

Argentina, Brazil, Indonesia, South Africa, Turkey to be affected by China

China’s reduced thirst for commodities would depress commodity exporters, especially the poorly managed emerging economies of Argentina, Brazil, Indonesia, South Africa and Turkey.

All five depend on continuing foreign-investment inflows and lack the cushioning effect of current-account surpluses to accommodate hot-money outflows, as happened earlier this year. Consequently, they were forced to raise already-climbing interest rates to attract new money and protect their weak currencies. Their falling stock markets over the last decade also reflect economic and financial weaknesses.

Tuesday, June 10, 2014

Gary Shilling: Short Chinese stocks, sell commodities

Short Chinese stocks

The Shanghai Composite Index is down 67 percent from its October 2007 peak. Even though Chinese stocks may seem inexpensive -- the price-to-earnings ratio for the Shanghai index over the last 12 months is 9.8, compared with 17.3 for the far more costly S&P 500 -- there is no obvious floor. If China has a financial crisis, the risk to Chinese equities is considerable. Bank stocks may be especially vulnerable. Investors who lack direct access to mainland Chinese stocks can use Hong Kong-listed equities and exchange-traded funds.

Sell commodities 

Industrial and agricultural commodity prices took off in 2002, right after China joined the World Trade Organization. As manufacturers in Europe and North America shifted production to China, its thirst for commodities kept growing. Many producers of industrial materials, including base metals, iron ore and coal, also increased capacity as prices leaped.

Along came the global recession, which drove down materials prices in response to weak demand. Prices soon recovered, only to fall again in 2011, possibly in anticipation of slowing growth in China, which is embarking on a difficult transition from an export-led economy to one driven more by domestic spending. A financial crisis in China would no doubt further depress commodity consumption and prices.


Monday, June 9, 2014

What could trigger China financial crisis

China's growing list of problems, including a slowing economy, rising militarism, messy corruption crackdown and increasingly troubled shadow banking sector, could provoke a major financial crisis. 

Thursday, June 5, 2014

Gary Shilling worries of rising potential for conflict in Asia

China believes that, as a world economic power, it must have a major military presence. The government’s budget calls for a 12.2 percent increase in spending in 2014, much greater than the 7.5 percent GDP growth target, yet in line with past increases. Defense spending — $132 billion for 2014 — is more than double the 2007 level (although some experts believe China vastly understates its defense spending).

China’s military outlays are only 22 percent of the US’s $608 billion, but China’s costs are much lower. And while China’s spending grows rapidly, President Barack Obama is calling for a $400 million cut in defense outlays in fiscal 2015. China’s official military budget also excludes big-ticket items such as arms imports and military components of its space program.

One danger sign of a more muscular military sector is the ongoing spat with Japan over disputed islands in the East China Sea, which may have oil under them. China is also in a dispute with Vietnam over China’s deployment of an oil rig into South China Sea waters that both countries claim.

Then there is the problem of a nuclear-armed and unpredictable North Korea. China probably worries a lot about North Korea and its volatile dictator, Kim Jong-un. But China no doubt likes to have the Hermit Kingdom as a buffer against a militarily strong South Korea.

I’m not predicting major conflicts in Asia any time soon. Still, rising nationalism in China and Japan, to say nothing of Russia, is a concern.

Wednesday, June 4, 2014

Rapid growth to resume after deleveraging completes

We’re in what I call the Age of Deleveraging. My book from 2010, The Age of Deleveraging is about this.

This global deleveraging, or working off of excess debt, normally takes about 10 years, that's the historical average. We’re six years into this, so another four years of slow growth could be expected. As a matter of fact, at the rate the deleveraging is taking place now, it will probably take longer than that.

And if that’s another three of four years, we'll probably have the Fed and other central banks maintain essentially zero short-term interest rates for that period. All the attempts thus far to revive rapid growth with fiscal and monetary ease have not worked, and that shows the power of this deleveraging. But beyond that, I think we’re going to see the resumption of rapid growth. That’s what I talked about at this year’s Strategic Investment Conference (SIC).

I call this “theory follows fact.” When fact continues for long enough, the theories come out of the woodwork as to why it's going to last forever. Of course, it’s very easy to sell “slow growth forever” when investors see it happening before their very eyes. People will say "Hey, right on brother, I see that right in front of me."

But I think we are going to see resumption of rapid economic growth. We're going have a return to rapid productivity growth. We have a lot of new technologies: biotech, robotics, additive manufacturing etc. that more in their infancy than they are fully developed. And they're going to drive productivity, and we’re probably going to have a lot of people come back into the labor force, a lot of people have dropped out because they couldn’t find jobs. I think we're going to reform our education system to orient more toward where the jobs are and less toward people taking a soft major in college and just assuming that because they got a college degree from Podunk University they deserve a job.

I think there’s going to be a lot of very favorable developments.


Monday, June 2, 2014

China slowdown will affect world economies

China is the world’s second-largest economy, even if it remains an economic pygmy, with $6,091 in per-person gross domestic product in 2012, compared with the US’s $51,749. Its global importance was magnified when North America and Europe shifted their manufacturing to the Middle Kingdom. That shift made China the primary importer of raw materials and exporter of manufactured goods.

China’s size and impact on the global economy mean that China’s problems are now the world’s problems. No single issue is likely to cause a major crisis, yet in combination they certainly could.

The first and biggest problem is slowing economic growth. Until 2008, China had accelerating double-digit real GDP growth. Then the recession and retrenchment of US and European buyers knocked growth down to 6 percent — a recessionary rate for China.

The coming economic transition the government is planning is the second big challenge. After the recession, Chinese leaders realized their earlier growth model — with an emphasis on exports and the infrastructure that supported it — wasn’t working. Most of its exports were bought by Americans and Europeans. But as those economies continue to deleverage and grow slowly, the game has changed.

Now, Chinese leaders want to shift from export-driven to domestic-led growth.

But in promoting a consumer-led economy, China is way behind the goal post. The latest data from 2012 show that consumer spending only accounted for about 36 percent of GDP, far behind the developed countries. Even emerging economies are faring better: Russia’s consumers make up 48 percent of GDP; India’s are 60 percent and Brazil’s 62 percent.

The government knows that to increase consumer spending it must increase incomes and reduce savings. Chinese households don’t have much of a safety net to fall back on, so they save almost 30 percent of their income to cover health care, retirement and education.

Slow growth in US, Europe affects Emerging economies

These countries, whether they're in Asia or Latin America or Eastern Europe, they depend on exports for growth. And where do those exports go? They go to Western Europe and North America. If you’ve got slow growth in both those areas, growth in demand for everything is weaker. And that's why the Chinese, for example, are trying to convert from an export economy to more of a domestic-driven economy.

But then within the developing countries, you have specific differentiations between them. And some of these countries are very well-managed, like South Korea or Malaysia. They tend to have a current account surplus. This means that the internal savings by business, consumers, and government all combined exceeds domestic investment. Now, if saving exceeds investment, what do you do to with the excess? You export it.

If a country’s exporting capital and then the hot money that’s rushing in and out of these countries leaves, it means the current account surplus is going to be less, but they’re still going to be exporting capital. They’re not going to be in a troubled condition. And those well-managed countries that tend to have current account surpluses also tend to have stable currencies, low inflation rates, and stock markets that have been stable in the last decade and low interest rates.