Wednesday, July 29, 2009

A Piece of the Stimulus Pie; Ben Simpfendorfer on the Rise of a New Silk Road

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The Daily Reckoning
Wednesday, July 29, 2009

  • The housing bust is over? We think not...
  • Stimulus is a scam - on both sides of the Atlantic...
  • A letter from a Dear Reader...
  • Ben Simpfendorfer on the rise of a new Silk Road...and more!

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    A Piece of the Stimulus Pie
    by Bill Bonner
    London, England

    Despite what you are most likely reading in the press, the folks getting bailout money are pretty sharp. They're very good at gaming the system.

    More about that in a minute. First, the Dow went nowhere yesterday. Gold fell $14 to $939. And Newsweek magazine announced, "The Recession is Over." Newsweek hedged its bets; adding that the recovery won't be a piece of cake.

    Elsewhere in the news is word that the housing bust is over. The papers are reporting the first gain in housing prices in three years - based on the latest Case-Shiller numbers. Hallelujah...right?

    Hold on. There's too much statistical noise in the monthly figures. They just don't mean anything. A better measure is the annual trend. The Federal Housing Finance Agency says its index for May registered the smallest drop in 10 months...but is still headed down. (More on why it is destined to continue going down...later in the week.)

    Back to the stimulus and how it works...

    An article in today's International Herald Tribune tells the story of one area in Tennessee that has gotten stimulus money.

    "The cash that salvaged a county," says the headline. Perry County, southwest of Nashville, must be one of those places you don't want to stop when you're driving across the country. With 25% unemployment and no significant industry, it sounds dreadful - at least from an economic point of view. It might be a nice place to live - if you don't have to work for a living.

    So the county honchos figured the county needed a little stimulus. They managed to lay their hands on cash being passed out by the feds. It doesn't seem to bother anyone that the money belongs to someone else. Nor does the fact that it is now being frittered away in a bunch of make-work projects that nobody wanted to pay for even when they had some money. Nor that the stimulus-assisted businesses of Perry County now have an unfair advantage over their honest competitors in other parts of the state.

    The Armstrong Pie Company, for example, used taxpayers' money to expand: "New workers [hired with stimulus money] have helped the company triple its pie production and expand its reach through central Tennessee."

    A quick question: what happened to the pie companies that lost market share to Armstrong? And another: how is the economy any better off by stimulating one pie company to make more pies at the expense of other pie companies? And a final one: even if total pie consumption goes up - a larger pie! - where's the benefit?

    The whole thing is a scam!

    [The government will just keep on using taxpayers' money to pay for the stimulus - and what are you going to see in return? Most likely...a whole lot of nothing. You'll be better off setting up your own 'personal bailout' package...and you'll find all the resources to do just that right here.]

    More news, from The 5 Min. Forecast:

    "The credit crisis is over," declared Ian Mathias in today's issue of The 5.

    "No seriously, it is:


    "Banking lending rates reached a historic low today. At a wimpy 0.48%, three-month Libor is at its lowest rate since at least 1986, when the British Bankers' Association started keeping track. Compared with its post-Lehman Brothers peak of 4.8%, banks can now lend to each other at practically no cost. Credit, it would seem, is extremely liquid.

    "Remember the Libor/OIS spread? It's the complicated ratio of inter- bank lending rates to overnight index swaps that Alan Greenspan famously called a 'barometer of fears of bank insolvency.' It peaked at 3.6% basis points in October. Greenspan said credit would be in a 'normal' state when the spread hit 0.25%. This morning, it shrank to 0.29%.

    "That reminds us of a key theme of last week's AF Investment Symposium: Inter-bank credit is flowing, but that's no longer the problem. It was once about what banks didn't have - credit. Now it's all about what they've got - bad assets... and there's no three-month swap rate for those."

    If you couldn't join us in Vancouver for the Symposium this year, never fear - we recorded all of the main session presentations so you don't have to miss out on a single insight or piece of advice. Get the CD or MP3 (or both) recordings here.
    And back to Bill, with more thoughts:

    Talk about scams... Elliot Spitzer is back in the news. Speaking to MSNBC, the disgraced crime-fighter described the Fed as a "Ponzi scheme":

    "You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

    "The Fed needs to be examined carefully."

    Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him - by revealing that he had a bad habit...$1,000-an-hour hookers.

    Investigative reporters maintain that federal enforcement officials had the option of leaving Spitzer out of the news. Instead, the Bush Administration Justice Department decided to out Spitzer.

    The former NY Attorney General had this to say about regulatory reform:

    "Regulatory agencies already had the power to do everything they needed to do," he said. "They just affirmatively chose not to do it."

    Stimulus is a scam - on both sides of the Atlantic.

    In Europe the banks have a good hustle going - almost as good as in the United States. They borrow money from the European central bank and then lend it back to the government.

    The ECB loans money at low rates to the banks - hoping to encourage consumer and business lending. In June, for example, the banks borrowed 442 billion euros at a fixed interest rate of 1%. But lending to business and households is at its lowest level since record-keeping began - and slowing down, says James Saft in the International Herald Tribune.

    In May, Europe's money supply grew at a 3.5% annual rate, he notes. But lending to the private sector in June slowed to 1.5% from 1.8% a month earlier. Loans to nonfinancial corporations actually fell in May, while lending to households grew at less than 1%.

    If they didn't lend the money out...what did they do with it? Well, they did lend it - back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.

    Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None.

    And here's a letter from a Dear Reader:

    "It is about five years since I first read the DR and agreed with your recommended 'trade of the decade.' At that time it was clear to anyone who saw the busts of 1974, 1991 and 2001 that the next one was imminent, even though politicians, ratings agencies, financial services and real estate company directors and mainstream financial journalists were all 'asleep at the wheel.'

    "But were they? Maybe they saw it too but it did not suit them to take measures to prepare for the bust. After all, those in positions of power and influence are using other peoples' money to feed their ambitions and egos, and would probably have made very different calls had their own money been at risk on such a huge scale.

    "Fortunately, with my conviction stiffened by your comments in the DR, I sold down all the holdings in my family property investment company in the UK between 2004 and 2007, repaying £18m of bank debt in the process. 50% of the proceeds went into gold and silver. We have not made any money in the last year but this strategy has resulted in no loss in the credit crunch...yet!

    "So well done, Bill, on giving the baby boomer generation a lifeline in the form of sound common sense comment - and as you remind us, it is free!

    "Keep up the good work. I still await Gold:Dow - 1:1 although I may not live that long!"

    Ah, there's the rub...we may not live long enough...

    Surely the Dow will trade at a p/e below 8... And gold will trade at one times the Dow.

    But when?

    As we told the group in Vancouver, it will happen...but there could be a whole lot of depression before it happens. Depression could drive down gold prices...and discourage gold bulls. It could ruin stock portfolios...bankrupt pension and insurance funds...and put millions more people out of work.

    We don't doubt that the feds have the power to destroy the currency and create inflation. We doubt that they can do it in a controlled, gentle way. As the depression worsens and lingers...they'll become more and more desperate to raise inflation rates. They buy more bonds. They increase the money supply. They'll become more and more reckless as prices fail to reaction.

    [And when inflation hits - you'll be glad if you are holding onto some of our favorite yellow metal. Find out how you can get it at just a penny per ounce...see here.]

    Then...inflation rates won't go up gradually...they'll go up all of a sudden...surprising almost everyone. Holders of dollar bonds - notably the Chinese and Japanese - will panic and sell. All Hell will break loose.

    Will it happen in our lifetimes? Depends on how long we live...

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

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    The Daily Reckoning PRESENTS: The link between the economies in China and the Middle East are becoming stronger. And it's not just their economies - China and the Middle East are also finding reasons to turn to each other through culture, politics, or religion. Ben Simpfendorfer, author of the book, The New Silk Road, looks at this phenomenon below...

    The Rise of a New Silk Road
    by Ben Simpfendorfer
    Hong Kong, China

    In early 2009, China overtook the United States as the world's largest exporter to the Middle East, having already raced passed the United Kingdom and Germany. It was the first time in over 60-years that the number one ranking had changed. The event marked an important milestone in what is a rapidly strengthening relationship between China and the Middle East.

    But it is not Arab-style Wal-Marts who are responsible for the flood of "made-in-China" imports. It is instead individual Arab traders. Many of the traders can be found in Yiwu, a small Chinese city four-hours south of Shanghai. The city claims the world's largest wholesale consumer goods market selling the type of cheap gifts and household goods that sell in low-cost retail stores across the world.

    Yiwu receives 200,000 Arab visitors annually. It is a virtual Arab market town with over a dozen Arabic restaurants lining its main street. However, the number of Arab visitors only started rising after 2001. Higher oil prices helped explain the increase, as they left Arab governments, and ultimately, Arab households with more money to spend on consumer goods.

    However, visa restrictions were also important. How so? Western governments made it tougher for Arab traders to visit the West after September 2001 even as the Chinese government unofficially relaxed its visa policy. A few years ago, an Egyptian national might have taken 18 days or more to receive a visa to visit the United States. The same Egyptian could receive one to China in less than a day.

    The number of Arab visitors to China surged as a result, filling up flights between Dubai and the main Chinese cities of Guangzhou, Shanghai, and Beijing.

    The economic crisis has only intensified the trend. It's no wonder. The Middle East's imports from China are still growing, albeit in low single-digit figures, even as the United States imports from China collapse at near twenty percent rates relative to last year's levels. And Chinese manufactures are searching for new markets in the Middle East as a result. It is just one more sign of the change in demand.

    Take Yang Linshan, for example, a fabrics manufacturer in the coastal province of Zhejiang. The Middle East now accounts for almost twenty percent of his exports. He is looking to set up a branch office in Dubai. Other manufacturers like Yang are meanwhile scouting for locations in the Middle East to build factories even as production costs at home rise. Egypt, with its low-cost workforce, is a particularly attractive investment destination.
    "The Middle East's imports from China are still growing, albeit in low single-digit figures, even as the United States imports from China collapse at near twenty percent rates relative to last year's levels. And Chinese manufactures are searching for new markets in the Middle East as a result. It is just one more sign of the change in demand."

    There are other signs of the growing strength in trade relations. Wang Weishang, a local entrepreneur, also from the coastal province of Zhejiang, has set up Asia Business TV, a cable television channel. The channel broadcasts throughout the Middle East via Nilesat. It runs regular English-language promotional spots for Chinese products and services to the Middle East's traders.

    It is individual stories such as these that help to underscore the depth of trade relations between China and the Middle East. And while the Middle East's $58 billion worth of purchases from China annually will grab headlines, it is the efforts of individuals like Yang Linshan and Wang Weishang that provide a more complete picture of strengthening economic relations between the two regions.

    Yet economics is not the only area where relations are strengthening fast. China and the Middle East are also finding reasons to turn to each whether through culture, politics, or religion.

    Take the Chinese author Song Hongbing. He believes the West is using its currency policy to prevent the East's rise. His best-selling Chinese-language book, Currency Wars, is being read by senior officials across China. The book includes such chapters as "Nuclear Finance: Target Tokyo" describing how the Plaza Accords, signed in 1985 between Japan and four Western nations, contributed to the collapse in the Japanese economy.

    The book's ideas are not just popular in China. They are also popular in the Middle East.

    I was reminded of this while recently watching Al Jazeera. Ahmed Mansour the anchor of No Limits, was interviewing the same Song Hongbing through a translator. Here was a Chinese author speaking on an Arabic-language TV program to an audience in the Middle East about how the West's currency policy has been used to suppress the East's rise. It was a remarkable exchange of ideas.

    It was also a reminder that the Middle East no longer looks only to the West for inspiration. Egyptian President Hosni Mubarak has visited China nine times in the past two decades. The Syrian leadership has also long looked to China for inspiration hoping to learn from what President Bashar Assad called the 'Chinese experiment' on his visit to China in 2004.

    Indeed, he is not the only Syrian official to visit China. Mohammad Dawood Al Sattam a member of the Baath Party Central Committee, visited Changsha, the capital of Hunan province, in late March. He was there on a study trip with fifteen other officials. Hunan is a major agricultural hub, land-locked, and famous for exporting labor to the country's coastal cities. Its economic reform experience was immediately relevant to the conditions that Al Sattam faces in his own province.

    There is even talk in the Middle East of learning from China during the current economic crisis. An article on Islam Online in late April described how Chinese traders are increasingly common in Cairo and its outlying districts. The article, quoting several local professors, argued that Egypt's youth, or "shabab", should copy the work ethic of these Chinese traders as a solution to dealing with the economic crisis.

    Certainly the relationship has its frictions. A flood of Chinese imports has resulted in the closure of many of Aleppo's traditional textile factories. The Syrian government has responded by imposing duties on select foreign textile imports rightly worried about the implications of job closures in a country where unofficial unemployment rates are estimated at upwards of twenty percent.

    But there is hope. Production costs in China are rising. Land and labor are all increasingly expensive. The Chinese currency is also appreciating in value. Nearly 10,000 factories have closed down in the southern Guangdong province, neighboring Hong Kong, during the past year. More factories will close as the government is no longer willing to prop up low-value added manufacturers.

    This is perhaps Syria's chance to emerge as an export manufacturing hub. It lies not far from Europe, one of the world's largest consumer markets. It may yet sign a trade agreement with the European Union. More Chinese manufacturers will invest in Syria if this permits them easy access to the European market. Chinese textiles manufacturers are, after all, already investing in Egypt.

    Syria will never replace China. But it only has to capture a small share of China's trade with Europe to benefit. Consider this. China's exports to Europe have risen $225bn in the past decade. If Syria had captured just 1% of this trade it would have added 0.5 percentage points to the country's GDP growth annually, not to mention reduced chronic unemployment rates.

    The upshot is that relations between China and the Middle East might be flourishing. Yet they are also delicately poised. The fact China has pushed the United States aside as the Middle East's largest supplier will rattle doors in Washington. But it is important to look beyond the trade figures to the social and political implications of this increasingly complex relationship.


    Ben Simpfendorfer
    for The Daily Reckoning

    Editor's Note: Ben Simpfendorfer is Chief China Economist for a major global bank. He was previously Senior China Economist for JPMorgan Chase. He began his career in the Middle East and has lived in Amman, Beirut, and Damascus. He regularly appears on CNBC and Bloomberg, and is quoted by publications such as The Financial Times and The New York Times. He has lived in Hong Kong for nearly a decade, and speaks Mandarin Chinese and Syrian Arabic. His book, The New Silk Road, offers a unique perspective on a rising Arab world and its strengthening relations with China.

    Get your copy here.

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