Global markets

In this interview with Ticky Fullerton on ABC’s The Business on 6 May 2014, Roger looks at the Chinese export and property industries, and how they impact the Australian economy. Watch here.

by Roger Montgomery Posted in Economics, Global markets.

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The Nasdaq fell more than 3 per cent overnight. What’s behind it? continue…

by Roger Montgomery Posted in Global markets.

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In this interview with Ticky Fullerton on ABC’s The Business on 8 February 2014, I discuss the implications of the recent Australia-Japan Free Trade Agreement, and the moves that should have been made instead – starting with a comprehensive tax review. Watch here.

by Roger Montgomery Posted in Global markets.

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Condemnation of Russia’s annexation of Crimea by Ukraine’s northern and western neighbours has been surprisingly quiet, and once again the US has been left to do the heavy lifting in terms of playing “global sheriff”. continue…

by David Buckland Posted in Economics, Global markets.

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By Derek Scissors, published in the South China Morning Post

People are going to be discussing the flaws of Chinese finance for many years. Here’s a helpful guide: as soon as you see or hear “China’s Lehman moment” used seriously, stop paying attention. continue…

by Guest Author Posted in Global markets.

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Over the past decade many Chinese-based companies have listed in the US. For the larger stocks, such as PetroChina, China Mobile and CNOOC, the American Deposit Receipt (ADR) represents a secondary listing, and often Hong Kong is the primary place of listing.

However for about 200 smaller stocks (with an aggregate market capitalisation of US$84 billion), the US is their primary market.

continue…

by David Buckland Posted in Financial Services, Global markets.

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The Federal Court’s decision against ratings agency Standard & Poors has significant implications for both the Australian and global markets – Roger provides insight into why this is so in discussion with Ticky Fullerton on ABC1’s The Business broadcast 6 November 2012, together with his insights into the latest RBA rates announcement. Watch here.

by Roger Montgomery Posted in Global markets, TV Appearances.

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In 2008, China implemented a massive economic stimulus program focused on fixed assets, with a concentration on construction. This program may have been necessary for stabilisation, but led to significantly increased capacity, particularly in China’s steel and cement industries. Annual capacity growth in recent years has been double or triple China’s economic growth.

Australia’s material stocks were beneficiaries of strongly rising demand for coal and iron ore, and many were at or near record share price highs in the first half of 2011.

Meanwhile the Shanghai Composite Index at 2100 is at the lowest level since the GFC lows of late-2008.

The consensus view is for increased infrastructure spend from China over the foreseeable future to boost demand and prices. If correct, one might conclude that the slowdown is already “priced in”. However, we have been examining the interim results of Chinese cement, steel and shipbuilding companies. We are seeing severe earnings downgrades across the board: capacity is exceeding production, utilisation is declining, demand is restrained and inventory levels are rising. Excess steel production is being exported and many global steel and material companies are also seeing their earnings severely cut.

While the Chinese command economy might continue building the odd ghost city or expressway into the Gobi Desert, the transformation from fixed asset investment to consumption is less steel intensive. Until the severe downgrade of the Chinese (and international) material stocks becomes consensus, Montgomery will continue to keep our powder dry in this area.

by Roger Montgomery Posted in Global markets.

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“The more European leaders talked at a dinner last Wednesday, the grimmer Angela Merkel looked. One after another, they spoke out in favor of the joint assumption of debt and against the strict austerity course Berlin is calling for. The chancellor stared silently at the man who was responsible for this change of mood — France’s new president, François Hollande, who noted with satisfaction that there was “an outlook for euro bonds in Europe.”

Merkel disagreed, saying that euro bonds are not the right tool, but to no avail. Only a minority stood behind the German leader. Even European Council President Herman Van Rompuy said, at the end of the dinner, that there should be “no taboos,” and that he would examine the idea of euro bonds. “Herman,” Merkel blurted out, “you should at least say that some at this table are of a different opinion.”

…..

The fight has only just begun, and so it comes as no surprise that the roar of battle is drowning out everything else at the moment. But there are also signs of rapprochement. During his first official visit to Berlin, Pierre Moscovici, the new French minister of economics and finance, revealed some sympathy for the German line. He confirmed the new French government’s intention to reduce the national deficit in the coming year to below the upper limit of 3 percent of GDP, and to eliminate all new borrowing starting in 2017. He also underscored how important healthy budgets are for growth and employment. Those who have too much debt become impoverished, he said. And those who are poor, he added, cannot invest.”

From:  http://www.spiegel.de/international/europe/merkel-preparing-to-strike-back-against-hollande-with-six-point-plan-a-835295.html

I like Greg’s post on this subject here on the Insights Blog earlier today:

“With respect to Eurobonds, investors should understand that what is really being proposed is a system where all European countries share the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more fiscally responsible ones – Germany and a handful of other European states – actually obligated to make good on the debt.

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue “Warrenbonds.” About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a “holdout” to the success of the plan. You’d have 9 guys issuing press releases on their “general agreement” about the concept, and in his weaker moments, Buffett might even offer to “study” the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for Eurobonds.”

At worst your SMSF hangs in the balance.  At best expect a wild ride.

Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 29 May 2012.

by Roger Montgomery Posted in Global markets, Market Valuation.

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Forget Europe. That’s old news. The next surprise might just be a bursting of Japan’s bond bubble.  Nay, a bursting of Japan itself?

According to Fitch, gross general government debt of Japan is likely to reach 239 percent of GDP by end-2012, the highest for any Fitch-rated sovereign. Moreover, Japan’s Fiscal Management Strategy envisages declines in the government debt/GDP ratio only from fiscal year 2021.

Would you lend Japan money (or any country with these financials) at rates approaching zero?

Strong private savings contribute to the country’s persistent current account surpluses. But that’s all going to change as ageing baby boomers (who the government has been borrowing money from at near zero rates – its called financial repression) start to ‘dissave’. As they get older they will stop saving and start needing the cash to finance retirement and healthcare. The result is that the government will need to turn to foreign investors for cash and they are not going to accept zero rates when the country has debt of 240% of GDP.

According to Bloomberg: “How low can bond yields go without triggering a meltdown?

“This question gains urgency as 10-year government yields disappear before the world’s eyes. At 0.83 percent, the lowest level since 2003, they hardly compensate investors for the risks inherent in buying IOUs from the most indebted nation. Public debt is more than twice the size of the $5.5 trillion economy. Worse, it’s still growing. Fitch Ratings today lowered the sovereign-credit rating by one step to A+ with a negative outlook because of Japan’s “leisurely” efforts to cut debt.

“Ignore news that gross domestic product rose an annualized 4.1 percent from the final three months of 2011. The only reason Japan is growing at all is excessive borrowing and zero interest rates. The moment Japan trims its debt, growth plunges, deflation deepens and politicians will demand that the Bank of Japan do more. That’s been Japan’s lot for 20 years now.
Yet what if the BOJ isn’t just setting Japan up for the mother of all crises, but holding the economy back?

“A bizarre dynamic is dominating Japan’s financial system, one evidenced by two-year debt yields falling to about 0.095 percent. That is below the upper range of the BOJ’s zero-to-0.1 percent target for official borrowing costs. It’s below the 0.1 percent interest rate the BOJ pays banks for excess reserves held at the central bank. Such rates raise serious questions.

“The BOJ does reverse auctions where it buys government debt from the market. Last week, it failed to get enough offers from bond dealers. Now think about that: The BOJ prints yen and uses it to buy government debt from banks, which typically hoard the stuff. Last week, banks essentially said: “No, thank you. We’d rather have these dismal interest-bearing securities than your cash, because there’s really nowhere to put that cash anyway.” Banks certainly aren’t lending.

“Politicians are pounding the table demanding that the BOJ expand its asset-purchase program. That, of course, isn’t possible. The BOJ can hardly force banks to swap their bonds for cash. So Japan is left with a problem unique to modern finance. Banks like to keep more cash on deposit at the BOJ than they need to in order to earn a 0.1 percent rate of return, which is pretty good by Japan standards. To pay that rate, the BOJ creates new money, which does nothing to help the economy.

“This dynamic keeps Japan’s monetary engine in neutral at best, and at times running in reverse. Japan’s central bank is essentially now there to support bond prices. It’s a huge intervention that gets little attention. Headlines roll every time the Ministry of Finance sells yen in currency markets. The BOJ’s debt manipulation barely registers.”

Why today?

Last year it was Iron Ore and recently it was minings services for which we suggested conventional wisdom should be questioned.  I am posting this topic today because Fitch Ratings lowered Japan’s credit ratings citing rising risks to the sovereign credit profile due to higher public debt ratios.

The long-term foreign and local currency Issuer Default Ratings were lowered to ‘A+’ from ‘AA’ and ‘AA-‘ respectively. The Negative outlook on ratings was maintained.

“The country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk,” Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch.

The agency warned that a lack of new fiscal policy measures aimed at stabilizing public finances amid continued rises in government debt ratios could lead to a further downgrade.

Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 22 May 2012.

by Roger Montgomery Posted in Foreign Currency, Global markets, Market Valuation.

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