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The China View from 30,000 Feet

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom (click here for their home page). So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China?s GDP will triple relative to our own from current levels.

A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn?t work, they had another $500 billion package sitting on the shelf. But with GDP of only $6.5 trillion today, don?t count on China bailing out our $16.5 trillion economy.

China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC?s, and to live in big cities. Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75-story skyscraper is going up there every three hours!

Some 1,000 years ago, the Silk Road was the world?s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths.

Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the latter. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.

To me, this all adds up to buying on the next substantial dip big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

Egg McMuffin

FXI 4-23-14

DBA 4-23-14

PHO 4-23-14

Great Wall of China

Why Jim Chanos is Wrong on China

Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.

This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.

There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can.

Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.

However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.

While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.

Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.

China has already taken steps to head off a housing crisis, unlike the US. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.

I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.

FXI 4-3-14

CYB 4-3-14

CHL 4-3-14

ChinaChina: Not Enough Demand?

India is Catching Up With China

When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide.

Some 36 years later, and the subcontinent is poised to overtake China’s white hot growth rate.

My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country’s total GDP is only a quarter of China’s $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2013. Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly.

India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.

But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it’s going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.

A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That’s why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.

India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China’s 30-year-old ‘one child’ policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.

There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the People’s Congress in 2013 could lead to posturing and political instability, which the markets could find unsettling. India is the world’s largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization that took place 20 years ago.

I have been a big fan of India for a long time, and not just because they constantly help me fix my computers, make my travel reservations, and tell me how to work my new altimeter watch. In August, I recommended Tata Motors (TTM), and it has gone up in a straight line since, instantly making it one of my top picks of the year. On the next decent dip take a look at the Indian ETF’s (INP), (PIN), and (EPI).

PIN 12-11-13

FXI 12-11-13

TTM 12-11-13

India 2010 PopulationBetter to Own This Pyramid

 

China 2010 PopulationThan This Pyramid

 

RickshawTaxi! Taxi!

India is Catching Up With China

When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 36 years later, and the subcontinent is poised to overtake China’s white hot growth rate.

My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country’s total GDP is only a quarter of China’s $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.

Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.

India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.

But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it’s going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.

A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That’s why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.

India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China’s 30 year old ‘one child’ policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.

There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People’s Congress in 2013 could lead to posturing and political instability which the markets could find unsettling. India is the world’s largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.

I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).

INP 12-5-13

 

FXI 12-5-13

TTM 12-5-13

India 2010 PopulationBetter to Own This Pyramid

 

China 2010 PopulationThan This Pyramid

 

RickshawTaxi! Taxi!

How US Job Losses Will End

I was researching comparative Asian wage data the other day and was astounded with what I found. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18 fold increase in labor costs from ten cents an hour since Chinese industrialization launched in 1978.

This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What?s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub continent?s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.

This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods. Chinese wage growth at this rate takes them up to half our minimum wage in only five years.

This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea?s GDP growth is half that seen in China. These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring. This is why I have pushed the Vietnam ETF (VNM) on many occasions. I know every time I do this I get torrents of emails bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn?t buy a 50 acre industrial park there.? But, the numbers don?t lie.

FXI 8-22-13

EWY 8-22-13

PIN 8-22-13

VNM 8-22-13

Vietnam Flag

India vs. China

When I first visited Calcutta in 1976, 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 35 years later, and the subcontinent is poised to overtake China?s white hot growth rate.

My friends at the International Monetary Fund issued a report predicting that India will grow by 6.5% this year. While the country?s total GDP is only a quarter of China?s $6 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.

Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.

India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close, at 1.3 billion for China and 1.2 billion for India.

But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it?s going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.

A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That?s why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.

India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China?s 30-year-old ?one child? policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.

There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People?s Congress could lead to posturing and political instability which the markets could find unsettling. India is the world?s largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization that took place 20 years ago.

I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).

INP 8-8-13

FXI 8-8-13

TTM 8-8-13

India 2010 Population Better to Own This Pyramid

China 2010 Population Than This Pyramid

Rickshaw Taxi! Taxi!

The Future of Consumer Spending?

As part of my never ending campaign to get you to move more money into emerging markets, please take a look at the chart below from Goldman Sachs. It shows that the global middle class will rise from 1.8 billion today to 4 billion by 2040, with the overwhelming portion of the increase occurring in emerging markets.

The chart defines middle class as those earning between $6,000 and $30,000 a year. Adding 2.2 billion new consumers in these countries is creating immense new demand for all things and the commodities needed to produce them. This explains why these countries will account for 90% of GDP growth for at least the next ten years. It’s all a great argument for using this dip to boost your presence in ETF’s for emerging markets (EEM), China (FXI), Brazil (EWZ), and India (PIN).

Of course, you don’t want to rush out and buy these things today. Emerging markets have been one of the worst performing asset classes of the year. But the selloff off is creating a once in a generation opportunity to get into the highest growing sector of the global economy on the cheap. I’ll let you know when it is time to pull the trigger.

In the meantime, store this chart in your data base so when people ask why your portfolio is packed with Mandarin, Portuguese, and Hindi names, you can just whip it out.

World Middle Class

EEM 6-18-13

FXI 6-18-13

PIN 6-18-13

IDX 6-18-13

The China View from 30,000 Feet

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China?s GDP will triple relative to our own from current levels.

A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn?t work, they had another $500 billion package sitting on the shelf. But with GDP of only $5.5 trillion today, don?t count on China bailing out our $15.5 trillion economy.

China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC?s, and to live in big cities. Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75-story skyscraper is going up there every three hours!

Some 1,000 years ago, the Silk Road was the world?s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths.

Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.

To me, this all adds up to buying on the next substantial dip big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

FXI 6-12-13

DBA 6-12-13

PHO 6-12-13

Great Wall of China

Why Jim Chanos is Wrong on China

Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.

This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.

There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can. Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.

However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.

While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.

Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.

China has already taken steps to head off a housing crisis, unlike the US. The People?s Bank of China has raised bank reserve requirements five times, taking them to among the most stringent levels in the world. That is almost Canadian in its conservatism. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.

I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.

FXI 5-30-13

CYB 5-30-13

CHL 5-30-13

China China: Not Enough Demand?

Five Stocks to Buy for the Second Half

Take a look at the chart below for the S&P 500, and it is clear that we are at the top, of a top, of a top. How much new stock do you want to buy here? Not much. Virtually every technical trading service I follow, including my own, is now flashing distressed warning signals. Maybe we really were supposed to ?Sell in May and go away.?

All RSI?s are through the roof. We have not had a pullback of more than 3.2% in six months, the longest in history. It has been up 19 Tuesdays in a row. Some 67% of this year?s gains have been on Tuesdays, and 83% since the 2012 low. So buying Monday afternoon and selling Tuesday afternoon is the new winning investment strategy. It?s a day trader?s paradise. The market is clearly cruising for a bruising here.

A 5%-10% correction seems imminent. After that, we will probably power on to a new high by the end of the year. The Vampire Squid, Goldman Sachs, posted a 1,750 target for (SPY). Why not? Their number seems as good as any. Who knew that the top market strategist for the year would be perma-bull Wharton business school professor, Jeremy Siegel?

The smart money is sitting on its hands here, maintaining discipline, and waiting for better opportunities. It is also pounding away at the research, building lists of stocks to pounce on during the second half. It is still early, but here is my short list of things to watch from the summer onward.

Apple (AAPL) ? Rotation into laggards will become the dominant theme for those playing catch up, and the biggest one out there is Apple. Buy the dips now for a 25% move up into yearend. An onslaught of new products and services will hit in the fall, and the company is still making $60 million an hour in net profits. Look for the iPhone 5s, Apple TV, and new generations of the iMac, iPad, and iPods. It will also make its China play, inking a deal with China Telecom (CHA). The world?s second largest company is not going to trade at half the market multiple for much longer, especially while that multiple is expanding. Technology is the last bargain left in the market. QUALCOMM (QCOM) might be a second choice here.

MSCI Spain Index Fund ETF (EWP) ? Look for the European economy to bottom out this summer and recover in the fall. In the end, the Germans will pay up to keep the European community together. The reach for yield and the global liquidity surge will drive interest rates on sovereign debt down as well, accelerating the move up. Also, the more expensive the US gets, the more you can expect other parts of the world to play catch up. Spain is the leveraged play here.

iShares FTSE 25 Index Fund ETF (FXI) ? Now that the new Chinese leadership has their feet under the desk, look for them to stimulate the economy. China will play catch up with the US, which should start topping out by yearend. It is also an indirect play on the reviving Japanese economy, the Middle Kingdom?s largest foreign investor. Japan has gotten too expensive to buy, so consider this a second derivative play.

Proshares Ultra Short 20+ Year Treasury ETF (TBT) ? The Treasury market bubble is history, and it is just a matter of time before we break down from these elevated prices. Look for the ten-year bond to probe the high end of the yield range at 2.50%. I don?t expect Treasuries to crash from here, but you might be able to squeeze another 25% from the (TBT) in the meantime.

Citicorp (C) ? Look, the financials are going to run all year. Use the summer dip to get back into this name, the most undervalued of the major banks, and a hedge fund favorite. A multidecade steepening of the yield curve is a huge plus for the industry. Now that real estate prices are rising, some of those dud loans on their books may actually be worth something.

SPY 5-17-13

EWP 5-21-13

FXI 5-21-13

TBT 5-21-13

C 5-21-13