The financial world is centered in China this week of November 16 as the IMF (International Monetary Fund) leaders meet with Chinese and other global financial leaders.  The discussion is centered on how to improve the world’s financial stability by perhaps rebalancing the global currencies against each other.  It is time the Chinese Remnibi is strengthed versus the dollar and the practice of indexing the Chinese currencies against the US dollar to protect Chinese labor advantage is discontinued.  This will also mean increased domestic consumption by the Asian economies as the Western economies save to reduce debt.  CNBC reported the following late Sunday night, Central Standard Time: 
 

IMF Managing Director Dominique Strauss-Kahn said the countries at the heart of global imbalances needed to take various measures to ease them.

In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

“A stronger currency is part of the package of necessary reforms,” he said. “Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.”

His remarks come as U.S. President Barack Obama is in Shanghai on the first leg of a four-day visit that will grapple with economic imbalances and the future of the yuan.

Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.

“But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms,” he said.

Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority for them, he said.”
 

What does this shift imply for American based investors?  As the remnibi takes an increasingly important role in world trade and is gradually rebalanced to reflect the strength of the Chinese economy, it will cause investments in Asia to rise in value as the dollar declines against the Chinese currency with the resultant de-linking.  This trend will affect not only Chinese stocks, but also stocks trading in the markets of other major Chinese trading partners like Singapore, Taiwan, Indonesia, South Korea and of course, Hong Kong.  Those economies must rethink their own currency indexing strategies to maintain competitive trade parity and are very likely to emphasize indexing the remnibi as opposed to the US dollar.  Even Japan will probably see its currency strengthen versus the American currency as the Remnibi gains favor as an Asian trading currency.

Now is the time to acquire additional shares in Asian stocks, funds and ETFs.  Because of the recent runup in 2009, it will be better to average in a larger position over time rather than making a lump sum commitment.

A response to a post by my good blog friend, Nirav:

Nirav, this is the problem with professors having opinions. Some people may want to think those opinions are more meaningful or well-informed because a given professor happens to be employed by a school like Stanford, or NYU (Roubini). But, such professors opinions about the future are no better than yours or mine. Professors should teach, and not opine.

The first thing wrong with Taylor’s opinion is his lack of command of basic financial math. A 100% change in nominal GDP over 10 years (and the resultant 50% cut in debt to GNP ratio) does not require a 10% annual inflation, but a 7.2% inflation, according to the Rule of 72, something any college finance or economics professor should know. I fully expect a 6-7% inflation within 2 years and think the Fed and Treasury are actually trying to orchestrate that.

The second thing wrong with the Professor’s opinion is the statement that a “permanent 60% tax increase would be required” to balance the budget. That statement is inconsistent with the 10% inflation conclusion. I think taxes could be left unchanged, or only increased to the degree Obama proposes, along with spending decreases, and inflation will do the rest. Not only will inflation cheapen the debt over time, it also will increase the number of dollars in which the debt is paid off. Anyone who owned a home in the 1970s remembers what a good deal inflation was at that time, so long as the mortgage was fixed. You could buy a $40K home, watch it appreciate to $80K with inflation, but pay off the debt as though it were still $40K. To the degree the Feds fix our interest costs (by issuing 30 year bonds which they should be doing in a big way right now), we will all benefit from the repayment in debt with ever cheaper dollars.

Inflation is the only way out of this box. I think the 1970s scenario is not only likely to occur, but welcome. It helped us resolve our Johnson era “guns and butter” Great Society debt of the 1960s, which in its time, was every bit as problematic as where we are today.

I would go on to say that as a responsible investor, it is important to try and anticipate the future, and not wait for it to run you over.  If inflation is in our future, as I think it most surely is, then a prudent investment strategy will take that into account.  The way to not only beat, but prosper from inflation is to own hard (real) assets, or stocks thereof. 

Oil, natural gas, industrial metals, precious metals, timberland, ag commodities, all the equipment suppliers to those industries (Joy Global, Deere, Cat, Monsanto, Nabors, Transocean, Dow Chemical, Dupont), and even real estate or REITs in the near future (once RE stops deflating) will all benefit from a long period of moderate inflation.  The Fed has demonstrated in the past its ability to prevent hyper-inflation, so that should not be a great worry.  Ben Bernanke knows the economics playbook very well.  So, rather than nashing teeth over the course of easy money and tax deficits, instead, put those actions to your own advantage.

Here is his post:

How to Reduce a Trillion Dollar Deficit

Jim Cramer has started to promote Gold or the popular bullion ETF, GLD, as the best investment in this whacked market.  With this signal, I have pointed out to investor friends that they should sell gold (see: “Gold, Great for a Trade, Risky as an Investment” ). Cramer has proven to be the ultimate contrary indicator.

But the fact gold is going down just underscores the power of this deflationary environment. Gold does best during periods of inflation.   Deflations are inherently bad for hard assets of all kinds as fiat currencies increase in value (the definition of deflation).  Gold does not escape this effect, though for short periods of deflationary panic, like the past 2-3 months, gold may do well.

Deflationary spirals are self-feeding and there is little to stop them. People will spend less and less first through fear, and later because they are unemployed and have nothing left to spend. Unfortunately for this country, we just elected a president who does not get this (not that the previous one did either). Raising taxes into a depression is a VERY bad idea. It guarantees economic failure (see Hoover administration).  And don’t be fooled by the $200/250K promise to limit tax increases. It will be broken when revenues come in lower than expected because of the declining economy and the need to pay for expensive new entitlement programs.

I have harped here long and hard that the only way to fix a depression is to print money like crazy and “reflate” (see: Reflation Economics (or “The Minsky Solution” and Fixing a Deflation: A Most Intelligent Analysis).  I have even offered some ideas to both fix the housing market, and reflate at the same time, with little added debt to the economy: the 4%, 40 year fixed mortgage program for EVERYONE (not just the irresponsible few), and a no-interest, no-payment loan from the Feds for any balance above market value, repayable on home sale (forced and secured by a Federal lien to guarantee repayment).

These two programs, easy to implement and relatively cost effective (the Fed loan program would cost almost nothing compared to other current proposals like forced bankruptcy and all the court costs that go with that idea), would solve our housing AND banking crisis at the same time. Bank mortgage assets written down to 20 cents on the dollar would suddenly go back to almost 100 cents as even underwater mortgages were repaid in full to take advantage of the 4/40 and no interest loan programs.  The banks holding those “toxic mortgages” would see their balance sheets repaired and the capital ratios improved (every dollar of increased value in the loan portfolio goes directly to capital).  Bank stock prices would move up, dividends would increase and talk of nationalization of the banking industry would stop.  From there, we might be able to rebuild our economy as consumer confidence, and then business confidence would return.

Once we have a well functioning economy, THEN (and only then), if Obama wants to fund his social engineering programs, noble ambitions that they are, there would be a chance to break even on those programs without crushing the economy and everyone within it.   But as it now stands, he is impatient, suffering messianic impulses and not willing to wait for the economy to recover before he starts redistributing wealth.

How many ways is Obama wrong with his budget and spending plans?  Here are but a few:

1. Eliminating deductions for charitable contributions for the high income tax payers  that provide the bulk of non-profits’ budgets will spell doom for many non-profits and needy chartiable organizations.  Those organizations already were hit by the blowup of hedge funds, including the biggest of them all, the Madoff Fund.  Now, when they need financial help most, how ironic  Obama’s budget attacks his own natural constituency: non-profits and those that need charity.   He is eating his own children.
2. Eliminating the home mortgage deduction for higher income taxpayers does not help our housing crisis, it definitely hurts.  While this proposal might be defended in that it only hurts high income individuals who don’t really need the deduction (sarcasm intended), we all know that the threshold for “high income” will be reduced over time.  Taking away deductions will reduce housing demand and continue the downward spiral in home prices.
3. Eliminates subsidy for student loans through private banks (the Sallie Mae program) which benefit the middle class students and instead redirects those funds to PELL Grants which are only available to low income students.  Obama has made a decision to deny higher education to many middle class students, who might have good high school grades and bright future prospects, and will instead bless the poor who may or may not be good students now or in the future.
4. His ten year budget projects increased deficits (above those of the last eight years) until the end of that period, 2019.  So much for fiscal responsibility and his promise to cut the deficit made just a couple months ago.
5. Increasing income taxes on businesses, capital gains and dividends will not encourage employment, in fact it will insure that the 4-5% unemployment levels we have enjoyed the past decade will be a thing of the past and much longed for in the future.
6. An Environmental inspired “Cap and Trade” system will be applied to businesses that pollute (putting further pressure on our greatly weakened manufacturing sector and the blue collar jobs that go with that sector) and will apply an additional $80 billion a year in new taxes.  A business will have the choice to either clean up emissions or spend money on eco credits to offset emissions.  This will kill many globally marginal “heavy-industry” businesses and cost tens or hundreds of thousands of decent paying jobs.
7. The budget projects increased tax revenues based on assumptions of higher than average economic growth:  an assumption that “the next 10 years of GDP growth will be better than the previous 10″.  That is very hard to accept given the current near Depression circumstances and the anti-business, anti-growth leanings of the budget proposal
8. From this week’s Barrons: “Debt held by the public as a share of current-dollar GDP will run 58.7% in 2009. Data since 1969 show that it never ran higher than 49.4%, and that was in 1993, when the incoming Clinton administration was concerned about taming the debt.  Yet, even based on the president’s rosy (growth) scenarios, the outstanding debt is projected at 67.2% of current-dollar GDP by 2019.”

Contrary to statements from his Administration, this is not an “Honest Budget”.  There is much in it that is really as dishonest as anything we have seen from any recent President, as compared to the promises made during the campaign and after.

Any of you who would like, take my ideas and send them to your Congress persons. Republicans and Democrats alike. Only they can block the insanity of Obama’s proposals and save the economy (many Dem congresspeople are aghast at Obama’s tax and spend proposals).

Technorati Tags: Wealth, Money, Investment, Gold, Stocks, Bonds, Market, Crash, Crisis, Obama, Politics, Personal, Finance

I am so sick and tired of the lame efforts of our government to solve our financial crisis. The answer to the problem has always been obvious to many, but not to those in Washington who confuse our current problems with political agendas (like social engineering).

To solve our problems, we first have to fix what started the problem: the housing crisis. There has been too little done to solve this problem. President Obama’s feeble proposal to provide principal write-downs (bank “cram downs”) for a very small class of home owner, is much too little and too focused on a niche that most people consider unworthy: those that either defrauded their lenders through “liar loans” with no down payment, or those who were more innocently convinced to commit to an investment, a home, they could never have afforded.

 The $8000 one-time, first time home buyer subsidy is not much more well thought out. Very few people in a position to be a first time buyer can now afford it, as the younger people who mostly comprise this set are having a hard time getting or keeping jobs.  Those that need the subsidy most, homeowners trying to get above water on their existing mortgage, aren’t allowed to use this incentive, even if it would help unjam the home sales industry.

Here is a very simple proposal to fix the housing crisis, which will then fix the banking crisis and after that, the consumption crisis:

1. Create a government sponsored entity that will be able to take a stake in homes that are now under-water or in foreclosure. Fund that entity with unlimited funds to buy positions in such stressed homes: to buy down the principal to less than the market price. The mortgage industry can be used to implement the program, so no need for a huge new govermental department, only a few hundred people to administer the assets and monitor the mortgage companies. The funding will come from Treasury and be a few trillion, but as a loan, not as a transfer, requiring no new taxes.
2. Create a 4%, 40 year mortgage available to EVERY American (not the chosen few who are deemed needy by our liberal left government). This will pass the fairness test with taxpayers and will therefore gain majority support. This mortgage should be fairly liberal where credit worthiness (650 FICO) and equity (10% Down) are concerned to address the distance home prices have fallen
3. Every homeowner that is underwater on their mortgage, in default or foreclosure proceedings should then be offered the opportunity to receive a principal infusion from the national fund, at nominal interest (maybe 2% APR). The interest can be added back to the balance each year (negative amortizing). And this principal infusion will come with a lien against the property that must be resolved at the time of sale of the property. If the property sale price does not cover the principal balance, the remainder goes with the property to the next owner as a “cloud” on the title (unlike upaid property tax liens, this one will not have to be repaid to transfer title). The lien will be filed in the governing jurisdiction (state or county) as any lien would be, such as failure to pay property tax.
4. Once a home has received funds to bring down the principal to at least 90% of the appraised home value, a mortgage from the national program can be written at 4% which will provide very reasonable monthly payments, freeing up income for consumption. There is little chance of the home value continuing to decline if this program is implemented nationally and is available to everyone. The mortgage program will also be available to people moving up to a new home, so will create demand and get the home selling machinery working again.
5. The banks holding the “toxic mortgages” will suddenly find those mortgages no longer toxic as the defaults are instantly stopped. The value of bank assets will immediately be written up which will save the banking system and eliminate the need for any more bank rescues. Banks having taken money from TARP and TAF, will be able to repay the borrowing further helping the deficit.
6. The money suddenly available for consumption, home repair or updating, will put money into the hardest hit industries and stop the rise in unemployment.
7. The Federal government will hold the fund that provided the money to buy down mortgage principal for up to 40 years, at which time, the government will be made whole costing tax payers no more money.

So easy…yet so difficult for those who have more complex agendas on their minds.

Technorati Tags: Wealth, Money, Investment, Gold, Stocks, Bonds, Market, Crash, Crisis, Obama, Politics, Personal, Finance