by Addison Wiggin & Ian Mathias
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The first dispatch from our Chinese investment expedition
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Market issues vote of no confidence for global debt crisis… our thoughts, and target prices, for the euro
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Bill Bonner on why some fiscal rescues work… and why Europe’s won’t
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Which nations (or states) are next? Two charts weigh in
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“What about silver?” a reader asks. Our latest take on the “poor man’s gold” below
So over the weekend, we figured it out: Get on a plane in Washington, D.C. Fly 14 hours over the polar ice cap. Touch down in Beijing. Tack on 12 hours for the time change… and bingo, you are 26 hours in the future.
5 Min. Forecast? Forget about it. We’re already here. A full day ahead of schedule…
“It’s amazing what a few years of 10% compounded returns can do,” Bill Bonner said today while we were traveling back from dinner looking at the neon lights of Beijing’s bar district, not far from the Grand Hyatt where we’re staying. Bill was last here in the 1980s. At the time, there were few cars, many more bicycles and nothing like this hotel.
“One of the great investment opportunities of the next decade will be catering to the emerging middle class in China, India and Indonesia,” Chris Mayer, another of our compatriots on this excursion, writes today. “We wrote a little about Indonesia in the last Mayer’s Special Situations (MSS) and how it already is starting to contribute to the bottom lines of companies such as H.J. Heinz and others. Indonesia — with its 240-million person population — may be the next great consumer market to open up.
“CLSA, an investment house with expertise in Asia, predicts the consumer markets in China, India and Indonesia will enter a ‘hypergrowth’ phase as disposable incomes rise. CLSA notes that the number of Asians (excluding Japan) with disposable income of $3,000 will rise from 570 million people to 945 million by 2015. About 85% of that increase comes from just China and India.
“The consumption spending of this middle class will rise from US$2.9 trillion to US$5.1 trillion,” Chris cites CLSA as saying, “by 2015, with China, India and Indonesia contributing to 69%, 16% and 4% of the increment. By 2014, about 44% of the population in China will top this $3,000 threshold — a 27% increase over 2009.
“The future of Asia is domestic,” CLSA concludes. This chart shows you graphically the size of the dramatic increase this shift in incomes creates.
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“Focus in on the area under the line to the right of the dotted line. You can see the mass of consumers that will want all the things many of us take for granted — like Crest toothpaste and air conditioners. That’s a lot of money in the pool — and companies like Yum! Brands, McDonald’s, Wal-Mart, Carrefour, Starbucks and many others are all jockeying for a share in the prize. And, in many cases, already have substantial businesses here.”
Chris provides a few candid shots of our quick-off-the-plane-journey through a Carrefour in Beijing… and IKEA soon after… in his update to MSS readers. There will be more to come this week too as our nano-adventure unfolds.
“The judge has called his court back in session,” Ian Mathias writes, diligently keeping an eye on things back in Baltimore, “Jurors shuffle back to their seats. Have you reached a verdict? We have, your honor. We find the eurozone…
“Guilty.
“A whiff of financial aid, suggestions of austerity and a super-sized bailout have all been thrown at Greece, European banks and, de facto, the rest of the European economy. Nothing seems to have stuck.
“This time last week, the euro rallied and the world breathed a sigh of relief as the EU and IMF introduced their nearly $1 trillion rescue plan. Currency traders didn’t buy it. The sell-off started once again two days later.”
“The fact that the euro rallied for only two days,” says the Richebacher Society’s Rob Parenteau, “makes us think that the wolf pack of investors and speculators are currently calling the bluff of the ECB on currency intervention — or at least they are testing, probing and trying to ascertain how determined the ECB is to prevent further euro depreciation, and at what level.
“We are told the next big technical levels for resistance to the downward trend in the euro are at $1.23 U.S. dollars to the euro, and then again at $1.18. With Tall Paul Volcker’s publicly aired concern of a eurozone disintegration on Friday, the $1.23 level is about to be breached. We believe currency speculators have a good shot at taking it down to the $1.18 level before the ECB drops in with a sufficiently large currency intervention measure, to effectively command the wolf pack to sit, and then stay, like the good doggies the eurocrats are trying to breed over there.
“Our sense, however, is that initial efforts at currency manipulation by the ECB will fail. That means the $1.18 level will eventually fail as well, because wolf packs just do not take orders like domesticated dogs do. Consequently, we stand by our call that parity in the exchange rate between the euro and the dollar is the most likely ultimate stopping point, possibly as early as late summer.”
Richebacher Society members have been thoroughly briefed with Rob’s recommended ways to actually profit from this trend. Find out more, here.
“Rescues sometimes have happy endings,” Bill Bonner wrote on the plane while shuffling his way from Paris to meet us here in Beijing. “Households, companies and even governments… with enough self-discipline and some luck… can sometimes be pulled back from the brink. But they must be at the brink, not beyond it.
“Much is being made, for example, of Ireland. When world markets turned down in 2007, the Emerald Isle faced ruin. Like Britain and America, it had overdone it. Its banks, its households and its government had too much debt. At the brink, it took a knife to public spending, pledging to cut 7.5% of GDP out of the government's budget. There was some grousing and complaining. But generally, the Irish seem to be taking their surgery with good grace.
“An important detail: It was not too late. The Irish have a national debt equal to only 50% of GDP — about a third of the Greek total. Roughly, with a modest GDP growth of only 2.5% annually, the Irish could sustain their debt indefinitely. If they stick to the program, the debt problem could disappear…
“But how about the great European bailout? Will it make the debt problem go away? We will waste no time pussyfooting around the issue: 'No' is the answer. Many of the debts passed the brink between the living and the dead a long time ago. There is no way they can be revived. Europe is wasting its blood transfusions on a corpse.”
With those shiny, happy forecasts in mind, is it too late for I.O.U.S.A.? According to the murky market of credit default swaps, maybe:
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The credit default swap market is far from an authoritative source on sovereign credit risk (who better to trust… Moody’s?). But there must be some value in noting that speculators are currently offering 5-1 odds that the biggest state of our union defaults. Suffice to say, “better than Dubai ,but worse than Lebanon” is not an ideal fiscal benchmark for California, or the U.S.
What’s more, 91% of “restructuring experts” forecast a large U.S. municipality to default by the end of 2011. That’s the latest from default consultants AlixPartners, who surveyed a pool of American bankruptcy lawyers, bankers, turnaround consultants and other restructuring gurus.
This time last year, the same survey saw “only” 63% of respondents expecting a U.S. city or state to default.
With that in mind, don’t miss our coming issue of Apogee Advisory. A major focus of the issue is on the plight of U.S. municipalities and how the muni bond market is looking eerily like subprime circa 2006. We’re just putting the finishing touches on the issue… be sure to check it out, along with our first two beta issues, by subscribing here.
Four banks failed over the weekend, including a former TARP beneficiary. Midwest Bank and Trust, a $3.2 billion bank and recipient of $84 million in TARP bucks, failed along with three smaller banks on Friday. They actually won’t cost the FDIC too much, “just” $300 million, but it’s a shot across the bow… not all bailed-out banks are safe.
For all the forecasts above, the U.S. stock market is understandably skittish. The Dow fell over 1.5% on Friday as the euro touched a 19-month low versus the dollar, and it’s down another 1% as we write today.
Gold, on the other hand, found another record high on Friday just below $1,250. With the dollar index just shy of a 14-month high, gold’s strength is especially notable. More on precious metals in today’s reader mail.
One symptom of things to come in the debt crisis: disclosures like this:
This is not a misprint. The Italian government, for its 60 million citizens, has a fleet of government cars 629,000 strong, more than six times that of the spendthrift United States. With names like Maserati and Ferrari, it’s hard to blame them… but 629,000? That’s half the population of New Hampshire.
“Hey guys, you never mention silver,” a reader writes. “Some people are probably investing in silver, as I am. I am more bullish on silver than gold. It is the poorer man’s gold. The percentage yield on silver will be better on silver than gold… I am interested in your opinions.”
The 5: That’s not entirely true. Traders bought silver up to $19.73 an ounce late last week, a record high in dollars, and have since bid it back down to around $19.20.
So where to from here?
One good place to look might be the gold-silver ratio.
That chart expresses how many ounces of silver you could buy with one ounce of gold, in U.S. dollars. If you’re a silver bull, you’re looking to buy high and sell low on this chart… a lower ratio means that silver is more expensive compared with gold than usual.
The ratio is at 63 today, just a tiny bit higher than the 10-year average. So by that metric, there is no “screaming buy” discrepancy between the two metals. But no “screaming sell,” either. From a macro perspective — just as we’re inclined to view gold — we’re inclined to think silver is a good buy, as are most precious metals.
If you’d like a particular buys in the silver market see Byron King’s recommendations behind this promotional effort. From an ethical and commercial standpoint, our analysis is free, but the recommendations remain the province of paying readers. Thank you for understanding.
Cheers from Beijing,
Addison Wiggin
The 5.Min. Forecast
P.S. We’ve only on our first day here outside the Forbidden City. We’ve met several publishers and a venture capitalist. Tomorrow, we’re visiting the Bank of China and some fellow observers from TheStreet.com. Again, we’ll keep you posted. Thanks for tuning in.
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