Emerging Markets May Now Be Submerging
Kurt Brouwer July 1st, 2008
Source: Calculated Risk
China and India lose their appeal to investors on inflation fears (Telegraph.co.uk, June 20, 2008, Ambrose Evans-Pritchard)
The world’s fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade.
The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.
But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom.
“World growth is slowing and yet central banks might still have to tighten monetary policy, that is what is scaring people,” said David Bowers, the organiser of the survey. The vast majority of fund managers think earnings forecasts have lost touch with reality.
The exodus from China reached fever pitch this month as investors slashed their net “weighting” position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October.
As the chart above shows, the Shanghai stock market is off a bit more than 50% from its high point. Now, admittedly, it’s high point was a bit ridiculous, but a 50%+ drop is harsh medicine indeed. The concerns over China range from its high inflation rates (see 50% Chance of Recession — In China) to the impact of high energy prices on its growth rate plus the fact that as U.S. growth slows, exports to the U.S will slow as well. In addition, the Chinese regime has plenty of internal strife that has surfaced despite the clampdown on news from China. How quickly things change.
…Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.”Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse,” he said. “If you look at Spain and Italy, and even France, they are very weak.
“The Fed has eased dramatically, but the ECB hasn’t eased at all. It intends to tighten regardless of the consequences on growth. This is what is eating away at confidence in Europe,” he said.
Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.
As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street - despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001.
The long awaited “decoupling” has begun.
The United States looks like the winner after all.
I laughed when I read the second to last line — ‘The long awaited “decoupling” has begin.” This is a rather snarky reference to a popular yet faddish theory about emerging markets. The term decoupling refers to a theory that emerging markets such as China, India, Brazil and Russia — to name a few — are less dependent on exports to the U.S. and other developed countries than they were in the past. Therefore, a recession in America should not hurt them as much as it might have in the past. I believe there is some truth to this. However, we are probably seeing a global economic contraction, not just an American one. In the case of a global economic contraction, even a relatively mild one, emerging economies would tend to get hit harder than more developed economies, which have much more powerful internal markets for their products and services.
This last sentence about America being the winner may be a bit premature, but surely in a world where uncertainty abounds, the U.S. has to stand out above the crowd for the safety conscious investor. Interest rates are low and inflation — though surging right now due to oil and food prices — is still under control. Stocks have fallen nearly 20% from their high of last October. And, real estate is steadily being marked down as well. From the perspective of the global fund manager, what’s not to like?
Bear Market Blues? — Oil Stays Up; Stocks Fall
Kurt Brouwer July 1st, 2008
The first half of the year is over. Stocks, bonds, real estate and even the dollar have had a tough six months. But, oil is riding high. For some time now, the story has been that oil prices soar while the stock market tumbles and the dollar slides further. We are not quite in ‘bear market’ territory for stocks, which is a 20% + decline from the most recent high point. Though we are not quite there, it’s painfully close. This piece from the Wall Street Journal, [registration may be required; emphasis added] tells the tale:
Stocks Skid, Oil Soars (Wall Street Journal, June 30, 2008, Peter A. McKay)
A chaotic three months for Wall Street ended with a whimper on Monday.
Stocks sputtered across 2008’s halfway mark, with major indexes making only modest moves following a sharp two-day selloff at the end of last week. That plunge delivered the Dow Jones Industrial Average to the brink of bear-market territory, but investors appeared disinclined to give blue chips a final shove as they closed the books on a brutal second quarter. The Dow is down 19.9% from its October 2007 record high.
The industrials eked out a slim gain of 3.50 points to end at 11350.01 Monday, virtually unchanged in percentage terms. Despite the small climb, the blue-chip yardstick had its worst June performance since 1930 and ended the quarter with a 7.4% decline.
The S&P 500 rose 0.1%, or 1.62 points, at 1280.00, leaving it down 3.2% on the quarter. The Nasdaq Composite Index fell 22.65 points, or 1%, to 2292.98. It was held back by declines in tech giants like Research In Motion, which fell 3.4%. The Nasdaq advanced 0.6% in the quarter but remains down 19.8% from its multi-year high hit last October.
…Such worries continued to simmer Monday as oil hit a fresh intraday record near $144 a barrel. Oil trimmed its gains to finish nearly unchanged, at $140 in New York, but crude gained 38% on the quarter and is nearly double its level at this time a year ago…
The market action in both oil and stocks illustrates George Soros’ concept of reflexivity almost perfectly. Soros wrote in his book, The Alchemy of Finance (Wiley), that markets are inherently reflexive. That is, buying begets more buying until a peak is reached and then selling begets more selling until a bottom is reached. A market that is hot (oil) will continue to attract buyers who act under the belief that it will keep going higher and higher. A market that is cold (stocks) will continue to freeze out even the most patient buyers because they think it may keep going down. Of course, neither belief is correct. No market (such as oil) grows to the sky, but no market (such as the stock market) falls to zero either.
We do not know how far stocks will fall, but eventually all the sellers will have sold and the market will rally. Similarly, at some point, the price of oil will falter due to a combination of weakening demand and increasing supply. Again, we do not know how far up it will go before that point is reached, but reached it shall be.
U.S. Senate Outsources Its Own Restaurants
Kurt Brouwer June 30th, 2008
This is ironic. The U.S. Senate has been forced to privatize its own restaurant due to poor food and service, not to mention financial losses. Anyone who has ever run a restaurant knows how difficult it is to do. But the Senate has a captive audience and, by all rights, it should be able to run a profitable operation.
Senate Votes To Privatize Its Failing Restaurants (Washington Post, June 9, 2008, Paul Kane)
Year after year, decade upon decade, the U.S. Senate’s network of restaurants has lost staggering amounts of money — more than $18 million since 1993, according to one report, and an estimated $2 million this year alone, according to another.
The financial condition of the world’s most exclusive dining hall and its affiliated Capitol Hill restaurants, cafeterias and coffee shops has become so dire that, without a $250,000 subsidy from taxpayers, the Senate won’t make payroll next month.
The embarrassment of the Senate food service struggling like some neighborhood pizza joint has quietly sparked change previously unthinkable for Democrats. Last week, in a late-night voice vote, the Senate agreed to privatize the operation of its food service, a decision that would, for the first time, put it under the control of a contractor and all but guarantee lower wages and benefits for the outfit’s new hires.
The House is expected to agree — its food service operation has been in private hands since the 1980s — and President Bush’s signature on the bill would officially end a seven-month Democratic feud and more than four decades of taxpayer bailouts.
Sen. Dianne Feinstein (D-Calif.), chairman of the Rules and Administrations Committee, which oversees the operation of the Senate, said she had no choice.
“It’s cratering,” she said of the restaurant system. “Candidly, I don’t think the taxpayers should be subsidizing something that doesn’t need to be. There are parts of government that can be run like a business and should be run like businesses.”
In a letter to colleagues, Feinstein said that the Government Accountability Office found that “financially breaking even has not been the objective of the current management due to an expectation that the restaurants will operate at a deficit annually.”
In other words, the Senate thought running restaurants like a government operation instead of a real business was just fine. After all, aren’t annual deficits just part of the normal function of government? Amazingly enough, Senator Feinstein disagreed and helped push through the change. However, Senator Menendez did take note of the fact that he and other Senators have engaged in heated senatorial rhetoric condemning privatization or outsourcing. Now, the Senate will be doing what many of its members have long condemned when businesses have done it:
But Sen. Robert Menendez (D-N.J.), speaking for the group of senators who opposed privatizing the restaurants, said that “you cannot stand on the Senate floor and condemn the privatization of workers, and then turn around and privatize the workers here in the Senate and leave them out on their own.”
The Senate Restaurants, as the food service network is known, has a range of offerings, from the ornate Senate Dining Room on the first floor of the Capitol, where senators and their guests are served by staffers wearing jackets and ties, to the huge cafeteria in the Dirksen Building and various coffee shops throughout the Senate complex.
All told, they bring in more than $10 million a year in food sales but have turned a profit in just seven of their 44 years in business, according to the GAO.
Making money seven years out of 44 is difficult to justify though. And, that apparently has finally broken through the ideological barrier at the Senate. Although I suspect that wasn’t the real issue:
The rules committee began exploring its outsourcing options in 2005, when Republicans controlled the chamber. When Democrats took power last year, Feinstein ordered several studies, including hiring a consultant to examine management practices, before deciding privatization was the only possibility.
In a closed-door meeting with Democrats in November, she was practically heckled by her peers for suggesting it, senators and aides said.
“I know what happens with privatization. Workers lose jobs, and the next generation of workers make less in wages. These are some of the lowest-paid workers in our country, and I want to help them,” Sen. Sherrod Brown (D-Ohio), a staunch labor union ally, said recently. The wages of the approximately 100 Senate food service workers average $37,000 annually.
Feinstein made another presentation May 7, warning senators that if they did not agree to turn over the operation to a private contractor, prices would be increased 25 percent across the board…
It’s one thing to run losses as long as the taxpayer is footing the bill. But, when Senator Feinstein gave them the bad news, the Senators acted. Good stewardship can be put off, but the horror of a 25% price increase finally got some action:
Eventually, Democrats agreed to pass legislation that includes guarantees for those who go to work for Restaurant Associates. They would retain their current salaries and federal health and pension benefits. Employees who choose to leave instead would receive buyout packages of as much as $25,000 — paid by the Senate. Half the current employees are likely to take that deal.
New employees, however, will not receive federal benefits, though they will be allowed to unionize.
By one estimate, Restaurant Associates would turn a large profit within three years and would begin paying about $800,000 annually in commissions to the Senate.
In the final days of negotiations, Feinstein rolled her eyes and took a deep breath before explaining the ordeal that the Senate Restaurants had become for her.
“It’s clearly not the sort of thing that I ran for the Senate to do,” she said. “But somebody has to do it.”
Kudos to the good Senator from San Francisco. You don’t think this could represent a trend do you?
Unemployment Rates for High School and College Grads — Chart of the Day
Kurt Brouwer June 30th, 2008
Source: Carpe Diem
Just looking at this chart should be definitive for anyone questioning the value of education. Those who did not finish high school have an unemployment rate of 8.1%. Yikes. That is tough. High school graduates have 4.7% unemployment, which is quite a bit lower, but college graduates only have 2.3% unemployment. If you want to see how this same distinction works out in terms of money, see also Higher Education Means Higher Income — Chart of the Day.