With each passing year, international financial markets become less dependent on U.S. markets. The old catchphrase “When the U.S. economy sneezes, the world catches cold” is gradually losing relevance.
2007 is shaping up to be a lot different than 1997, a year when currency crises spread like wildfire throughout emerging markets. In just 10 short years, a scenario resembling the Asian financial crisis has little chance of repeating. Asian central banks -- along with those of most other emerging economies -- have been steadily building the international currency reserves necessary to weather a panic out of their local currencies. They’ve learned the lesson of avoiding a situation in which their currencies become hostage to the whims of traders like George Soros.
“Everyone on Wall Street is fighting the last war. In the 1990s, virtually all emerging economies were deficit countries addicted to IMF loans. But since the 1997-1998 crises, they’ve gotten their fiscal houses in order. The U.S. is not the driver anymore. The U.S. economy is already in a major slowdown. If not for this, I’d expect oil to be in the mid-$70s.”
“I don’t think Russia wants to drive out Western investors. The government just wants control of strategic industries like oil. Russia is interested in attracting Western capital to industries like banking and consumer products.”
These are the views of Harvey Sawikin, portfolio manager at Firebird Management. Sawikin and his team understand Russian and Eastern European markets better than anyone else on Wall Street. Firebird’s 10-year performance record is stellar.
Sawikin spoke at last week’s luncheon hosted by the Baltimore CFA Society. This organization of financial professionals regularly invites great investors to share their experience and ideas.
Chris Mayer was also a guest at this luncheon and wrote about Sawikin in his latest Capital & Crisis update. Sawikin “believes business and growth in overseas markets are robust enough that they are not as dependent on the U.S.,” writes Chris. “He gave some interesting insight into Russian oil production. Sawikin says the Russians want to increase production, but not at these prices. ‘They don’t want dollars at the current valuation,’ Sawikin notes. ‘Officials have said so explicitly.’”
Awareness of the U.S. dollar’s inflationary endgame is growing. “Place yourself in the shoes of a Saudi or Russian oil minister. Why trade your increasingly scarce oil for a limitless future stream of paper money? This paper money only has value to the extent that it can buy scarce goods and services.”
This weekend’s Barron’s ran a piece on central banks’ rush to get into riskier asset classes -- and out of dollars:
“Russia, which was nearly bankrupt a decade ago, is planning to put a chunk of its $357 billion of official reserves into a Future Generations Fund that will invest beyond government securities. That fund could be staked with about $30 billion. South Korea has formed the Korea Investment Corp. with $20 billion, and Australia has launched a $40 billion Australian Future Fund.”
The same piece addresses China, the 800-pound gorilla of the currency reserve surplus game:
“The new Chinese fund investing in Blackstone, to be called the State Investment Co., could get $200-300 billion of capital and expand rapidly from that base because China’s currency reserves are growing by more than $200 billion annually. The Chinese government is thought to believe it needs no more than $1 trillion of reserves [emphasis added] to combat potential pressure on its currency or deal with domestic financial crises.”
The Blackstone investment marks a major turning point in Chinese currency strategy. Maybe the Chinese are realizing that perpetually financing U.S. deficits is a losing proposition -- as I wrote in your June issue. Under the current system, it’s better to be an equity holder than a debt holder. For those with an investing horizon stretching beyond a decade, this sentiment is shared by Warren Buffett. A worldwide portfolio shift away from U.S. Treasuries would exert even more upward pressure on rates, which have already spiked in recent weeks:
Another Barron’s piece quotes Ray Dalio, chief investment officer of Bridgewater Associates. His view clearly echoes Sawikin’s:
“Liquidity will tighten, credit spreads will widen, risk premiums will increase. In that regard, it will be the same. But unlike a decade ago, when emerging market currencies fell and the U.S. dollar rose, it will be accompanied by the U.S. dollar going down and those currencies rising. The positions of the emerging markets have shifted as dramatically as I have ever seen. There is usually a boom leading to increases in their current account deficits because they become a very popular place for foreigners to invest, and their currencies and their assets and their economies strengthen at the same time they have a deterioration in their balance of payments. Now they are having a boom, but they are running current account surpluses and paying down their debts. The emerging countries today are the lenders to the rest of the world, particularly the U.S.”
After Sawikin’s talk, the representative from the Baltimore CFA Society mentioned the fact that there are now more Asian than American CFA candidates. This news even reached the pages of the Financial Times last week. Considering its inflating equity bubble, China will need more CFA charter holders to develop mature equity markets. There ought to be quite a few cheap stocks to analyze after the Shanghai stock market bubble pops.
According to The Wall Street Journal, “In China, individuals, often with little understanding of financial concepts, make up 60-80% of trading, unlike U.S. markets dominated by financial giants such as Goldman Sachs Group Inc.” Apparently, many Chinese are day trading stocks on the basis of superstitions and “lucky numbers,,” rather than fundamentals. “They often make do with folksy trading tips, such as those now circulating among investors advising people to wear red clothes, which are representative of a ‘hot’ market, and to eat beef to sustain the ‘bull’ run…” Watch out if Chinese traders start wearing blue.
When this bubble pops, it will not be pretty. But it won’t end China’s long-term economic growth story; a possible Shanghai Composite crash is one of the many reasons the People’s Bank of China has been beefing up its foreign currency reserves. The 1997 Asian currency crisis taught the Chinese -- along with the Koreans, Malaysians, Thais, Russians, etc. -- that a pile of foreign currency can shore up public confidence during financial panics.
2007 is shaping up to be a lot different than 1997, a year when currency crises spread like wildfire throughout emerging markets. In just 10 short years, a scenario resembling the Asian financial crisis has little chance of repeating. Asian central banks -- along with those of most other emerging economies -- have been steadily building the international currency reserves necessary to weather a panic out of their local currencies. They’ve learned the lesson of avoiding a situation in which their currencies become hostage to the whims of traders like George Soros.
“Everyone on Wall Street is fighting the last war. In the 1990s, virtually all emerging economies were deficit countries addicted to IMF loans. But since the 1997-1998 crises, they’ve gotten their fiscal houses in order. The U.S. is not the driver anymore. The U.S. economy is already in a major slowdown. If not for this, I’d expect oil to be in the mid-$70s.”
“I don’t think Russia wants to drive out Western investors. The government just wants control of strategic industries like oil. Russia is interested in attracting Western capital to industries like banking and consumer products.”
These are the views of Harvey Sawikin, portfolio manager at Firebird Management. Sawikin and his team understand Russian and Eastern European markets better than anyone else on Wall Street. Firebird’s 10-year performance record is stellar.
Sawikin spoke at last week’s luncheon hosted by the Baltimore CFA Society. This organization of financial professionals regularly invites great investors to share their experience and ideas.
Chris Mayer was also a guest at this luncheon and wrote about Sawikin in his latest Capital & Crisis update. Sawikin “believes business and growth in overseas markets are robust enough that they are not as dependent on the U.S.,” writes Chris. “He gave some interesting insight into Russian oil production. Sawikin says the Russians want to increase production, but not at these prices. ‘They don’t want dollars at the current valuation,’ Sawikin notes. ‘Officials have said so explicitly.’”
Awareness of the U.S. dollar’s inflationary endgame is growing. “Place yourself in the shoes of a Saudi or Russian oil minister. Why trade your increasingly scarce oil for a limitless future stream of paper money? This paper money only has value to the extent that it can buy scarce goods and services.”
This weekend’s Barron’s ran a piece on central banks’ rush to get into riskier asset classes -- and out of dollars:
“Russia, which was nearly bankrupt a decade ago, is planning to put a chunk of its $357 billion of official reserves into a Future Generations Fund that will invest beyond government securities. That fund could be staked with about $30 billion. South Korea has formed the Korea Investment Corp. with $20 billion, and Australia has launched a $40 billion Australian Future Fund.”
The same piece addresses China, the 800-pound gorilla of the currency reserve surplus game:
“The new Chinese fund investing in Blackstone, to be called the State Investment Co., could get $200-300 billion of capital and expand rapidly from that base because China’s currency reserves are growing by more than $200 billion annually. The Chinese government is thought to believe it needs no more than $1 trillion of reserves [emphasis added] to combat potential pressure on its currency or deal with domestic financial crises.”
The Blackstone investment marks a major turning point in Chinese currency strategy. Maybe the Chinese are realizing that perpetually financing U.S. deficits is a losing proposition -- as I wrote in your June issue. Under the current system, it’s better to be an equity holder than a debt holder. For those with an investing horizon stretching beyond a decade, this sentiment is shared by Warren Buffett. A worldwide portfolio shift away from U.S. Treasuries would exert even more upward pressure on rates, which have already spiked in recent weeks:
Another Barron’s piece quotes Ray Dalio, chief investment officer of Bridgewater Associates. His view clearly echoes Sawikin’s:
“Liquidity will tighten, credit spreads will widen, risk premiums will increase. In that regard, it will be the same. But unlike a decade ago, when emerging market currencies fell and the U.S. dollar rose, it will be accompanied by the U.S. dollar going down and those currencies rising. The positions of the emerging markets have shifted as dramatically as I have ever seen. There is usually a boom leading to increases in their current account deficits because they become a very popular place for foreigners to invest, and their currencies and their assets and their economies strengthen at the same time they have a deterioration in their balance of payments. Now they are having a boom, but they are running current account surpluses and paying down their debts. The emerging countries today are the lenders to the rest of the world, particularly the U.S.”
After Sawikin’s talk, the representative from the Baltimore CFA Society mentioned the fact that there are now more Asian than American CFA candidates. This news even reached the pages of the Financial Times last week. Considering its inflating equity bubble, China will need more CFA charter holders to develop mature equity markets. There ought to be quite a few cheap stocks to analyze after the Shanghai stock market bubble pops.
According to The Wall Street Journal, “In China, individuals, often with little understanding of financial concepts, make up 60-80% of trading, unlike U.S. markets dominated by financial giants such as Goldman Sachs Group Inc.” Apparently, many Chinese are day trading stocks on the basis of superstitions and “lucky numbers,,” rather than fundamentals. “They often make do with folksy trading tips, such as those now circulating among investors advising people to wear red clothes, which are representative of a ‘hot’ market, and to eat beef to sustain the ‘bull’ run…” Watch out if Chinese traders start wearing blue.
When this bubble pops, it will not be pretty. But it won’t end China’s long-term economic growth story; a possible Shanghai Composite crash is one of the many reasons the People’s Bank of China has been beefing up its foreign currency reserves. The 1997 Asian currency crisis taught the Chinese -- along with the Koreans, Malaysians, Thais, Russians, etc. -- that a pile of foreign currency can shore up public confidence during financial panics.
No comments:
Post a Comment