Investing
China Expert And Money Manager Mark DeWeaver Warns That A Chinese Economic Bust Is Likely And Could Impact Investors Worldwide
Monday, June 24, 2013 16:24

Tags: China | investing

 

The New York Times reported today that Chinese government officials telephoned Hong Kong counterparts to request they allow NSA-leaker Edward Snowden to leave Hong Kong. While the Chinese intervention was a surprise, Americans probably should be prepared for more rough patches in U.S.-China relations. To divert attention from domestic economic problems, the Chinese are likely toughen rhetoric with the U.S. and also up the stakes in their skirmishes with Japan and India over disputed territories. These were some of the points made in last Friday’s webinar by Dr. Mark DeWeaver, a principal at Quantrarian Capital Management.

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DeWeaver, who worked in China for eight years and is co-manager of a hedge fund investing in Asia, says China's economy is subject to boom-and-bust cycles and that the time is nearing for a down cycle. DeWeaver says local government officials in China are rewarded with promotions based on economic growth in their provinces or cantons. As a result, he says, China has overbuilt its infrastructure in many regions.   
 
DeWeaver, in his recent book, Animal Spirits with Chinese Characteristics: Investment Booms and Busts in the World's Emerging Economic Giant, documents flaws in the Chinese economy, which could have repercussions for investors worldwide.
 
For example, DeWeaver says 25% of Chinese wind-power capacity is not connected to the grid. Why? Because, he says, the Chinese built wind farms in recent years in the windiest areas of the country without regard to whether electric power would actually be needed there. Consequently, the wind turbines go unused, deteriorating fast because they are frequently sandblasted by wind storms. Similarly, DeWeaver says, new airports were built by local officials without regard to whether air traffic justified their construction. Consequently, large airports operate for years and lose money or get closed because they become to expensive to maintain.
 
DeWeaver says that while “bridges to nowhere” get built in the U.S. the magnitude of boondoggles in China is much greater. He says provincial officials in China have built amusement parks, factories and other projects with little or no economic justification and that paying the debt on these projects and continuing to operate them unproditably is likely to hamper economic growth in China for many years.
 
DeWeaver predicts that the Chinese government could face growing domestic unrest if the economy sinks into the long period of sub-par growth. He says the Chinese will likely divert attention from the poor economy by pointing to problems with the West or neighboring nations.  
 

 

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Standard & Poor's Upgrades Outlook For U.S. Credit Rating
Monday, June 10, 2013 14:44

Standard & Poor's, which downgraded the U.S. credit rating nearly two years ago, said Monday it was more optimistic about the nation's long-term fiscal situation and had removed the negative outlook from the rating.

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The automatic federal spending cuts that began March 1 and other recent developments that led to a reduction in this year's projected federal budget deficit caused S&P to change the outlook for the U.S. rating to stable, reports the Los Angeles Times.

 

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SEC Proposes Long-Awaited Money Market Fund Reforms To Protect Investors From Runs; Agency Seeks Comments On Proposals
Thursday, June 06, 2013 11:53

Tags: sec

The Securities and Exchange Commission today voted unanimously to propose rules that would reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. A 90-day period will begin now in which the agency invites comments from the public and financial services experts on the proposal.

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The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.

 

"The proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package -- requiring that prime institutional funds have a floating NAV and be able to impose fees and gates in times of stress, and that retail funds be able to impose fees and gates," SEC chairman Mary Jo White said in remarks at an open meeting of the commission. " We specifically solicit and I am interested in commenters' views on this combined approach."

 

The SEC began evaluating the need for money market fund reform after the Reserve Primary Fund “broke the buck” at the height of the financial crisis in September 2008.

 

Invented in the early 1980s, money market funds are now a significant piece of the nation's financial system. They provide short-term financing to corporations, banks and governments and hold nearly $3 trillion in assets, the majority of which are in institutional funds. In September 2008, the height of the financial crisis, a money market fund "broke the buck" and could not offer the $1 NAV to its shareholders. Within the same week, according to White, investors  pulled approximately $300 billion from other institutional prime money market funds. "The contagion effect was rapid," White saiud. "The short term credit market dried up, and corporations had trouble borrowing to run their businesses. This reaction contributed to the significant disruption that already was consuming the financial system."

 

“Our goal is to implement effective reform that decreases the susceptibility of money market funds to runs and prevents events like what occurred in 2008 from repeating themselves,” said Mary Jo White, Chair of the SEC.

 

The public comment period for the proposal will last for 90 days after its publication in the Federal Register.

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A Good Week For The Keynesians: A Day After Lawrence Summers Tells Congress To Boost Deficit Spending, IMF Report Says Greek Crisis Was Worsened By IMF’s Austerity Measures
Thursday, June 06, 2013 10:36

Tags: economy

 

A day Lawrence Summers, a top economic advisor to two presidents, warned Congress against economic austerity in the U.S., the IMF said in a report that it had underestimated the “multiplier effect” of cutting government spending on the Greek economy, exacerbating the Greek financial crisis.

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“The (IMF) report said that the fund miscalculated the so-called multiplier, or the effect that adding or subtracting a dollar of government spending would have on the broader economy during the downturn,” according to The New York Times. “It underestimated the scale of what has proved to be a devastating Greek depression, fueled in part by sharp government spending cuts and tax increases.”
 
A day earlier, Summers, a former Secretary of the Treasury in the Clinton Administration and head of the National Economic Council for President Barack Obama until November 2010, offered testimony before Congress against cutting government deficit spending in the U.S.
 
Borrowing to support spending, either by the government or the private sector, raises demand and therefore increases output and employment above the level they otherwise would have reached. Unlike in normal times, these gains will not be offset by reduced private spending because there is substantial excess capacity in the economy, and cannot easily be achieved via monetary policies because base interest rates have already been reduced to zero. Multiplier effects operate far more strongly during financial crisis economic downturns than in other times.
 
It would not be desirable to undertake further measures to rapidly reduce deficits in the short run. Excessively rapid fiscal consolidation in an economy that is still constrained by lack of demand, and where space for monetary policy action is limited, risks slowing economic expansion at best and halting recovery at worst. Indeed, there is no compelling macroeconomic case for the deficit reduction now being achieved through sequestration, as the adverse impacts of spending cuts on GDP more or less offset their direct impacts in reducing debt.
 
Attention should be devoted to measures that reduce future deficits by pulling expenditures forward to the present when they have the additional benefit of increasing demand. It is important to recognize that just as increasing debt burdens future generations, so also does a failure to repair decaying infrastructure, or to invest adequately in funding pensions, or in educating the next generation burdens future generations. Wherever it is possible to reduce future public obligations by spending money today, we should take advantage of this opportunity especially given the very low level of interest rates. In particular, a major effort to upgrade the nation’s infrastructure has the potential to spur economic growth, raise future productive capacity and reduce future deficits. It should be a high priority.

 

 

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Could Japan's Long Struggling Economy Finally Be Pulling Out Of Its 25-Year Malaise?
Tuesday, May 21, 2013 08:28

Japan has been running a monetary experiment--shock therapy for its ailing economy. It's highly controversial. While it's similar to the liquidity injected into the Ameircan economy by the Federal Reserve since the financial crisis, the amount of liquidity being injected into Japan's economy is much, much greater. What's interesting is that it is working.

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Japan’s $5 trillion economy grew at a robust annualized pace of 3.5% in the first quarter. "The stock market has soared more than 60%over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports," says The New York Times.  

 

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