Friday, February 22, 2013

Japan could be back

For however much I dislike Abe personally, looking beyond the urge that my behavior bias would like to instill in me, his declaration that “Japan is back” could become the reality if Japan sticks to the current economic policies (given that he is in power and does not yield to pressure). I do not like him for denying all the atrocity Japan has inflicted on other countries during WWII and for much longer to China and Korea, but I also would like him to continue to be in power to prove that the economic policies he uses is correct and is the way to go for the other developed countries in chronical recession. I meant to say some good words months ago when he first created a lot of noise on his new economic policy but do not have time, as always. But you should know my stand.

Almost coincidentally, Japan is also the first country to get off the shackles of gold standard and also the first country to recover from the Great Depression era. For any doubters, go and see Figure 5 of Eichengreen (1992). I have been using this graph marked with colors for years. If anything it tells you that we should welcome currency wars (not necessarily the trade wars, but even that may not be unnecessary in today’s world when all the Eastern Asia countries and European core countries are keeping pushing to keep the imbalance alive). Currency wars will provide monetary stimulus around the world and get us out of the Great Recession sooner. Although Reinhart and Rogoff argue that the recovery has to be slow, many times it could be a man made consequence instead of having to be that way. Economics is not morality but many are overcome by the behavior bias of morality and mix it with economics. 

US of A is a great country, Republican Party is a great Party, but history may leave the latter in dust if it does not change dramatically

Admitting or not at your own peril, the latest election is marking the start of a turning point for the Republican Party that could leave it in the dustbin of history. This is the great party of Lincoln, Teddy Roosevelt, to name a couple. But according to Jeb Bush, his dad, and likely Ronald Reagan according to my guess, would not even be able to win Republican primary to contend in the presidency campaign if they are trying today. As I said, I have no party bias. But I am afraid that many of my friends who have strong Republican views will get their behavior bias aroused when reading this blog. If we step back and be rational, you should notice that America is changing. If the Republican Party insists on its current policies, it likely will suffer more setbacks in the next midterm election and probably some huge defeat in the next presidential election. The tragedy of history and my personal observation of human nature are that only crisis can give some chance of revival; and sometimes even crisis does not do it.

If it sounds too good, it is a Ponzi scheme

Many investors still have illusions about investing in China, especially Chinese who know relatively less about the outside word and who have the blind confidence about government’s ability to eventually clean the mess. Their number is smaller compared to the time when I start to turn bearish on China. For example, many still boast to me about how much return they are getting on their wealth management products. However, they just do not have common sense (if you read this blog and find me to be too arrogant, that is because 1) as I said a long time ago, you need to take a strong stand to be heard; 2) there are just too many irrationality in investors, many of them are just smart people.) The returns they get could be easily between 6-10%. If you add 1-2% for the transaction costs, the borrowers have to pay easily about 8%. For an equity holder who takes more risks, unless they make higher returns than fixed income claim holders, say 10% or much more if you understand how much hassles are to do business in China, otherwise why would they take the additional risks? But have you ever seen many projects returning that high in China today? So why not just invest in wealth management products as well and get the safe 6-10% returns, which means no one is out there generating wealth anymore. A friend told me that years ago, it is very hard to drive through the main drag in Dongguang, an industrial capital in Pearl Delta. Now he can zoom through by stepping on the gas without any release in the matter of minutes.

By the end of next years, but probably earlier, we will hear cries and see tears in those wealth management products.

The US will take a while longer to recover

Just a few months of relatively positive news, the sillies at the Fed already start to make noise about taking “unlimited” QE away. It is really not unlimited, and should be much larger. Taking it away earlier would only send Treasury yield down eventually before the Fed has come back to do even bigger “unlimited” QE again (bigger unlimited, see how silly it is). This reminds me of my visit to the Fed in early 2011. Everyone I met there tells me how they are preparing and proposing the mechanisms to take away QE liquidity (note that this means to stop QE, and also reverse it). Two years down the road we are still in bigger unlimited QE. For the US to recover with the half hearted decision makers and the constant distraction from the Republican side, it may take to 2015 for the economy to be on real sound footing. Fortunately, I do not think the detractors at the Fed will succeed, at least not this year. Unfortunately, it means bubbles in HK and many other places in the world will take longer to burst.

After the recovery is on sound footing, then it is the time to think about dealing with deficit.