Global Markets Archives - Page 11 of 55 - Money Morning - Only the News You Can Profit From
Rising Wages in China Good for Glocals, But Few Jobs Coming Back
Although some economists have predicted that steeply rising wages in China would bring some jobs back to the United States, the biggest winners will be the large multinational companies operating in China.
Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%.
And with an eye toward booting domestic consumption, the government plans to keep the raises coming – on average 20% a year through 2015.
That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China – such as McDonald's Corp. (NYSE: MCD) – but is dramatically raising costs for Chinese manufacturers.
Between the wage increases and slumping global demand, the Federation of Hong Kong Industries warned on Tuesday that as many as one-third of Hong Kong's 50,000 factories could downsize or close by the end of the year.
As China's competitive advantage in wages erodes, some analysts have predicted a wave of jobs returning to the United States from China. A recent study by the Boston Consulting Group (BCG) forecast a return of 2 million to 3 million jobs by 2020.
But Money Morning Chief Investment Strategist Keith Fitz-Gerald doubts any repatriation of jobs will be quite so massive.
"That's wishful thinking on the part of Westerners," said Fitz-Gerald, who operates The New China Trader service for the Money Map Press, who noted that "labor rates are still very, very low" in China.
Although Fitz-Gerald said a few "industries with little value-added" could see the return of some jobs to the United States as a result of China's rising wages, other factors will restrain a mass migration of jobs across the Pacific.
Despite reports of major labor shortages in the eastern coastal parts of China, Fitz-Gerald said there remains "vast undeveloped low-wage areas ripe for industrial expansion" in the western provinces of China.
"They have a 50-year initiative called the "Go-West' program that is designed to push labor from the eastern regions to the western ones," Fitz-Gerald said. "If the jobs are pushed west, there will be no great exodus of jobs from China."
The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico.
"That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep."
With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping.
MF Global Bankruptcy Exposes Vulnerability of U.S. Banks to Eurozone Debt Crisis
The bankruptcy of MF Global Holdings (NYSE: MF) was a distressing signal to investors that it is possible for U.S. financial institutions to fall victim to the Eurozone debt crisis.
MF Global filed for Chapter 11 bankruptcy Monday after credit downgrades led to margin calls on some of the $6.3 billion in Eurozone sovereign debt the bank held. The position was five-times MF Global's equity.
Although the major U.S. banks have less exposure relative to available capital, their many tendrils in Europe – particularly to European banks – will inevitably drag them into any financial meltdown in the Eurozone.
Even the U.S. banks' estimated direct exposure to the troubled European nations of Portugal, Ireland, Italy, Greece and Spain (PIIGS) is disturbingly high – equal to nearly 5% of total U.S. banking assets, according to the Congressional Research Service (CRS).
And according to the Bank for International Settlements (BIS), U.S. banks actually increased their exposure to PIIGS debt by 20% over the first six months of 2011.
But the greatest risk is the multiple links most large U.S. banks have to their European counterparts – many of which hold a great deal of PIIGS debt.
"Given that U.S. banks have an estimated loan exposure to German and Frenchbanks in excess of $1.2 trillion and direct exposure to the PIIGS valued at $641billion, a collapse of a major European bank could produce similar problems inU.S. institutions," a CRS research report said earlier this month.
Of course, the major banks say their exposure to the Eurozone debt crisis is much lower because they've bought credit-default swaps (CDS) to hedge their positions. Credit-default swaps are essentially insurance policies that pay off in the event of a default.
"Risk isn't going to evaporate through these trades," Frederick Cannon, director of research at investment bank Keefe, Bruyette & Woods Inc., told Bloomberg News. "The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who's ultimately going to pay for the losses?"
Spain's Economic Crisis Shows the Eurozone Can't Escape its Debt Trap
Fresh evidence of Spain's deepening economic crisis has revived fears about that nation's ability to dig out of its sovereign debt problems, and illustrates why the Eurozone debt crisis is likely to drag on for years.
Spain's gross domestic product (GDP) was flat in the third quarter, the country's central bank said yesterday (Monday). That follows anemic growth of 0.4% in the first quarter and 0.2% in the second quarter.
Even more troubling is the nation's unemployment rate, which rose to 22.6% in September – the highest in the Eurozone.
As one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), Spain has been trying to wrestle down its high sovereign debt with austerity measures. Unfortunately, those measures are driving the Spanish economy toward recession, which is making it impossible for the government to hit its budget deficit reduction targets.
"It will be very difficult to meet the deficit goals without additional austerity, which might push the economy back into recession," Ben May, a European economist atCapital EconomicsinLondon, told Bloomberg News. May thinks Spanish unemployment could go as high as 25%.
Each of the PIIGS faces the same cycle of futility – economy-killing austerity measures that erode the nations' ability to cope with their debt issues, necessitating even deeper austerity measures.
But without the economic growth to create the wealth to cope with the budget deficits, the Eurozone debt crisis will gobble the PIIGS up one by one.
In Greece's case, its faltering economy led to a series of bailouts from the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), to avoid default.
But the Greek economy is among the Eurozone's smallest. If the other PIIGS, particularly Italy and Spain, descend to where Greece has fallen, there won't be enough money to rescue them.
"Unless European economies outgrow their deficits, the chance of rolling bailouts working is slim to none," said Money Morning Capital Wave Strategist Shah Gilani.
This Birthday Is Nothing to Celebrate
The world's 7 billionth person is likely to be born today (Monday).
However, this birthday isn't something to celebrate.
Since the global population passed 6 billion only in late 1999, we've added more than 80 million people each year on average. And the environmental footprint of those people is expanding rapidly as emerging market populations modernize.
The planet may be able to accommodate these extra people and their consumption – but then again, it may not.
And if it can't, the drain on our planet's resources could harm us all.
So we'd better find a way to reduce population growth – fast.
Of course, if you think I'm about to propose something along the lines of China's one-child policy, you couldn't be more wrong.
We have economic means of population control that are neither coercive nor costly. And the sooner we implement them, the better.
A Disaster in the Making
When Thomas Malthus warned of overpopulation in 1798, the global population was approaching 1 billion – a level it reached in 1804. It had grown in the previous three centuries from 500 million in 1500. Thus, if the gradually increasing prosperity of 1500-1800 had continued – without the Industrial Revolution increasing world production capacity artificially – it would have reached 1.62 billion by 2011.
There is a very good case to be made that 1.62 billion is today's natural population, and that the growth since 1800 is artificial, caused by the Industrial Revolution removing previous limits on production. At that level, almost all serious environmental problems would go away. Even if all 1.62 billion of the world's inhabitants enjoyed Western living standards, the global warming and pollution effects of their output would be easily absorbed by the planetary ecosphere.
Around 2004, U.N. population projections had us reaching a population of 8 billion by 2027, then peaking at around 9.3 billion just before 2050 and declining slowly thereafter. Alas, the latest projections are not so sanguine. They have no peak in population this side of 2100, with population passing 10 billion and reaching 10.12 billion in 2100.
At this level, an environmental disaster is very likely.
Jim Rogers Says New Greece Deal Can't Save Europe
Investing legend Jim Rogers said that although the latest Eurozone deal for Greece is more generous than he expected, it's not enough to solve Europe's problems.
"Politicians have delayed addressing the problem yet again," Rogers told Investment Week. "It will come back in a few weeks or a few months and the world will still have the same problem, but this time only worse because the European Central Bank and other countries will be deeper in debt."
The deal European leaders hammered out on Thursday includes boosting the region's rescue fund to $1.4 trillion (1 trillion euros) and asking bondholders to take a voluntary 50% haircut on Greek debt.
Unfair Chinese Business Practices Threaten Profits of U.S. Businesses
U.S. companies have become increasingly worried that unfair Chinese business practices are hurting their ability to compete and will start eating into the juicy profits they've been extracting from the Asian giant.
Problems with how China treats foreign businesses have been simmering for several years, but a recent incident with Wal-Mart Stores Inc. (NYSE: WMT) has pulled those issues back into the spotlight.
Earlier this month the Chinese city of Chongqing forced Wal-Mart to close 13 of its stores for two weeks because officials said the retailer had mislabeled less expensive pork as a better organic type. The officials also fined Wal-Mart $423,000 and even arrested two employees.
This unusually severe response isn't the first. Chinese authorities in May fined Unilever PLC (NYSE ADR: UL) more than $300,000 for announcing that it planned to raise prices – a move officials said undermined the government's attempts to control inflation. French-based Carrefour (PINK: CRRFY) was fined for posting erroneous prices.
Google Inc. (Nasdaq: GOOG) had a protracted battle with Chinese authorities last year over censorship of its search service. Google moved its search engine overseas in protest. Many analysts saw the incident as a way for the government to shepherd users toward domestic search giant Baidu Inc. (NYSE ADR: BIDU).
These penalties top years of unfair Chinese business practices that give advantages to state-owned businesses, including regulations that compel foreign companies to transfer their technology to Chinese firms and laws that weigh more heavily on foreign companies than domestic ones.
"If I were a foreign company, I'd be pretty scared right now," Corbett Wall, a retail expert who heads Shanghai consulting firm +CW Associates, told USA Today. "I absolutely think that [what happened to Wal-Mart] has to do with tensions building up between China and foreign companies."
Big U.S. companies have relied on expansion into China's growing economy to prop up earnings during a period in which Western economies have sagged. They're concerned that if the trend of unfair Chinese business practices worsens, it'll threaten their profits.
According to the 2011 annual survey of U.S. companies conducted by the American Chamber of Commerce in China (Amcham), a majority of U.S. businesses – 71% – said China's licensing process discriminates against foreign companies.
And 40% said they thought the "indigenous innovation" policy – in which the Chinese government favors domestic companies over foreign ones in matters of official procurement – would hurt their business. More than one in four – 26% – said that policy already had hurt them.
A similar number, 24%, said that economic reforms in China had not improved the business climate for U.S. companies, a steep increase from the 9% who said so a year earlier.
At the same time, 78% of U.S. companies said that their operations in China were "profitable" or "very profitable."
"There are two themes to the data," Amcham China Chairman Ted Dean told Bloomberg News. "American companies are doing well and American companies are concerned about in some cases the current regulatory environment and in others the trend line for the regulatory environment."
Four Moves to Make Before Greece Defaults
The very austerity measures that Greece implemented to remedy its sovereign debt crisis have crippled its economy so badly the country is actually sinking deeper into the red, making default all but inevitable.
Already suffering from a four-year-old recession, the Greek economy has been dragged down further by the series of austerity measures – tax increases combined with cuts in pensions and wages. As a result, the Greek economy is expected to contract 5.5% this year and 2.5% in 2012.
The Greek government announced this week that unemployment soared to 16.5% in July, up from 12% a year earlier. It's expected to rise to 17.5% before the end of this year.
With its gross domestic product (GDP) shrinking, Greece has less money to repay its debts, and worse, it must continue borrowing at higher interest rates.
Greece's debt-to-GDP ratio is expected to rise to 162% this year and 181% in 2012.
"Without drastic action, [Greece's] debt-to-GDP ratio will rise to even more alarming levels," a Milken Institute report on the Greek debt crisis said earlier this month. "The ratio is reaching levels at which it becomes extremely difficult, if not impossible, for a country to avoid default on its debt."
Even the "troika" of Greek lenders – the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) – concluded in a report released yesterday (Thursday) that the troubled country's "debt dynamics remain extremely worrying."
"When compared with the outlook of a few months ago, the debt sustainability has effectively deteriorated given the delays in the recovery, in fiscal consolidation and in the privatization plan," the report said.
The report also expressed concern that Greece's budget deficit for 2011 will fall between 8.5% and 9% of GDP, which exceeds the target of 7.75% of GDP set by the troika as a condition for granting the most recent batch of bailout loans.
To continue to meet the troika's criteria for still more bailout loans – which Greece must have to avoid default – even more austerity measures will be needed.
But the Greek public, as well as many politicians, has displayed more resistance with each new set of austerity measures.
- Despite Global Slowdown, This Chile Fund Will Prosper
Don't Buy Into Europe's Latest Rescue Effort – The Continent's Banks Are About to Go Bust
The latest plan to preserve the European Union (EU) and save the global banking sector is to force European banks to increase their equity capital.
The goal, of course, is to restore confidence and stability. But if that's the case, then why are so many analysts and savvy investors still nervous?
To put it bluntly, because they know it won't work.
As it stands, the capital shortage is about 200 billion euros ($277 billion) according to the International Monetary Fund (IMF). I think it's more like 1 trillion euros ($1.4 trillion) by the time you factor in all the cross holdings and the daisy chain of exposure that makes the entire banking system there look like Swiss cheese.
Why Recapitalization Won't Work
There are three things that are especially problematic to me:
- European Union (EU) ministers apparently are going to put capital into the system without knowing how much it needs or exactly where to put it. Hard to believe, but thanks to the opaque nature of the derivatives markets, nobody can be sure exactly how much exposure any one bank or financial institution has.
- Healthy banks that do not need an infusion will get one anyway. Rainer Skierka, who is a stock analyst at Bank Sarasin & Cie AG, shares my belief that this will lead to massive dilution for shareholders.
- Any bank that is undercapitalized will effectively be the recipient of capital that has been diverted away from healthy banks and into its toxic financials. Unfortunately, this money will be placed at higher risk in an effort to earn the incremental income needed to backstop bad bets that already are on the books. That means shareholders who are led to believe things are improving will actually find their money at an even higher risk than before.
As I have noted repeatedly since this crisis began, regulators are fighting the wrong battle and have been since 2008. They are worried about liquidity when they should be worried about solvency.
Sure, a bank recapitalization can repair the banking system when it comes to keeping money moving in terms of short-term credit – but no amount of money can prepare European banks for a sovereign default or credit freeze because there literally isn't enough money on the planet to recapitalize the banking system unless you remove the risks that plague it.
The "system" is still at incredible risk.
The total worldwide notional derivatives exposure is more than $600 trillion dollars according to the Bank for International Settlements (BIS). And that's against a gross market value of merely $21.1 trillion.
In other words, banks have invested in instruments valued at $21 trillion but with a total exposure that's 28.4-times that — or $600 trillion dollars.
This is why rogue traders are such a problem; they can take disproportionately large risks with not a lot of capital, which often leads to catastrophe.
Take Nick Leeson, the former derivatives broker who worked for Barings Bank. His leveraged trading losses eventually reached $1.4 billion, or twice Baring's available trading capital. Barings went under as a result.
More recently, Kweku Adoboli, who served as director of exchange traded funds (ETFs) at UBS AG (NYSE: UBS), blew a $2 billion hole in UBS' balance sheet.
Part of the problem is that n obody knows exactly how much cash banks spend to amass such investments because derivatives and sovereign debt trading instruments are still largely unregulated and "self policed" within the industry.
So what's this have to do with our money?