So, Why are China, Japan, ROW Dumping Treasuries?

There is a debate going on here in the rest of the world concerning the United States. It isn't really whether American officials are trustworthy, but whether they are more of BS artists or ripoff artists. When it comes to foreign holdings of US Treasuries, it's arguably both: The United States likes to con others with "strong dollar" rhetoric as it runs unfathomable deficits and the dollar falls to some godforsaken level. There is a lie, and a large financial consequence to believing in such nonsense.

Or, is there a limit to global gullibility? Will the rest of the world continue to be held hostage to this "financial balance of terror"? As it turns out, the top two suckers--China and Japan--have actually been selling loads of dollar detritus in recent months. What's more, the rest of the world are following suit, intensifying movement away from greenback garbage:

China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June [there is a two-month lag with this data series], a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.

China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.

Bernanke spooking the markets by suggesting that the Fed will soon stop accumulating nearly unlimited Treasuries to lower borrowing costs is resulting in others' pre-emptive action to avoid near-term losses:

"The sell-off in Treasuries and Bernanke's tapering remarks are related," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "Lightning doesn't strike in the same place twice, but Bernanke repeated his comments in June and that roiled the market."

He said the net Treasury outflow was the highest since at least 1977 when the government started compiling the data. June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.

Are we reaching the outer limits to global gullibility in buying Treasuries? Given the aforementioned time lag in reporting the data, it will be interesting to note from forthcoming reports whether rising interest rates Stateside are driven more by Bernanke signalling the end of "money for nothing" policies or by central banks worldwide dumping Treasuries en masse.

Heaven knows, this world would be a much better place if the latter trend continues. Central bankers of the world, don't be afraid to dump those treasuries and teach America a lesson; in the end, only you will be responsible for your people suffering losses from hanging on to such worthless pieces of paper in their name.  

UPDATE: To be fair, the FT expects some bottom-fishing to buoy capital inflows into America in the next report.

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Why Venezuela Has Egypt-Like Forex Reserves

Unlike many (left-leaning) colleagues, I remain profoundly unimpressed by the "post-capitalist" stylings of countries alike Argentina and Venezuela. When it comes to the geopolitics of the world economy, I am generally unconcerned about whether countries style themselves as "pro-American" or "anti-American" since it's largely beside the point. The point being, of course, that perceived friendliness to the world's largest economy has little to do with sound economic management.

Today we have an excellent case in point: How the heck can Latin America's second largest oil exporter after Brazil have Egypt-like foreign exchange reserves? With sustained high oil prices for years and years, it's hard to imagine but it's true in the case of [surprise!] Venezuela. Nor did it help that Hugo Chavez stashed a lot of foreign exchange in state-owned enterprises, which are now likely to be recalled to help repay the debts of this financial basket case:

Venezuela can more than double its reported reserves, which fell to a nine-year low of $22.9 billion on Aug. 5, if it chooses to take control of all the dollars held by state enterprises as of March 31. Increasing its foreign-currency holdings would bolster Venezuela’s ability to repay $40.5 billion in obligations at a time when its borrowing costs, at 11.59 percent [!!!-such confidence in this socialist paradise], are almost double the developing-nation average, according to Bank of America Corp. in New York. 

Alike many gold bugs, Venezuela (wrongly) bet on ever-rising prices of gold, in which it has kept much of its forex reserves. So, when gold prices headed south, you know what happened to its reserves:

Venezuela’s liquid cash reserves fell 31 percent in the first half of the year to $3.1 billion, the central bank said yesterday. The bank had 11.8 million troy ounces of gold as of June 30, which it valued at $18 billion, down from $20 billion as of Dec. 31...

The 23 percent decline in reserves this year is mostly due to a 43 percent plunge in the price of gold, which accounts for 72 percent of holdings [my emphasis], Rodriguez said. Because the central bank values its gold holdings using a six-month moving average, reported reserves may fall by $1.1 billion more if gold remains at current prices, Rodriguez said in an Aug. 8 report.

“The fact that Maduro has given control of these funds to the central bank is definitely a credit positive move,” Bianca Taylor, senior sovereign analyst at Loomis Sayles & Co. in Boston, said yesterday in an e-mailed response to questions. “However, it is not a panacea. Venezuela’s problems are deeply structural.”

In other words, Venezuela has precious little cold, hard cash. ($3.1 billion? What's that, 1.25 seconds'  worth of US deficits?) Moreover, there is some doubt as to whether much dollars--currency of el diablo--are actually stashed away in SOEs. At any rate, I am still gobsmacked at the level of financial mismanagement here. You must be radically incompetent to turn Latin America's second largest oil exporter into a holder of Egypt-like forex reserves. Hoarding gold? Puhleeze.  

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Only in Hong Kong: Designer Handbags as Collateral

It's been such a long time since we've had a luxury goods feature, so here's one: Anyone who has been known to Asia knows the social pecking order here among cosmopolitan (small-c, that is) women has something to do with carrying designer handbags. Mainland China is becoming a large and lucrative market and Japan remains a steady customer for big-ticket items, but Hong Kong is still a prime destination--especially in designer-handbags-per-capita terms since the city is Asia's second largest market overall for these products. It does help that you can buy these items duty-free there. Some markets are built to retain their advantage for the long haul.

Therefore, it was only perhaps a matter of time that this global financial centre began offering to accept these designer handbags as collateral. Sure the mainland Chinese buy lots of those too, but those hordes of noveau riche do not have longstanding experience valuing such goods. Moreover, the kinds of financial services they offer are nowhere near as sophisticated as those of Hong Kong which are obviously on the cutting edge. So,without further ado, welcome the pawnbrokers accepting designer handbags:

Say hello to the handbag-backed loan, a unique Hong Kong phenomenon. While money lenders typically ask for cars and homes as collateral, Hong Kong's Yes Lady Finance Co. seeks its customers' beloved handbags. The four-year-old company accepts handbags on the spot, assesses them for their condition and authenticity and then procures loans within half an hour, as long as the bags are Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, they'll consider a Prada.

Prada? It's so very gauche, dahling [I adopt a haughty pose and turn up my nose at its mere mention]. Questionable workmanship and excessive marketing hype aside for the latter brand, many residents actually prefer this kind of fast finance to avoid the red tape incurred while dealing with conventional consumer loans. Hence, many customers are not really hard up as you would assume in other settings, but whose cost-benefit analysis regard handbags-as-collateral favourably:

In a city driven by consumers' voracious appetite for the newest and latest luxury products, handbag-driven loans are a lucrative business. Yes Lady takes a purse and lends clients 80% of the bag's value. Customers get the bag back by repaying the same loan with 4% monthly interest, within four months. Classic purses and special-edition handbags often retain much of their retail price.

The company recently gave out a roughly US$20,600 loan in exchange for a Hermès Birkin. But Yes Lady's purse-backed loans come in all sizes and start at about US$190 with no upper ceiling. Yes Lady is carving out a niche for itself in a city with 200 licensed pawnbrokers and over 900 moneylenders. The pawn industry, one of the city's most traditional forms of lending, targets primarily poorer residents and foreign domestic helpers. Pawnbrokers typically only accept watches, jewelry and electronics as collateral.

But unlike pawnbrokers, Yes Lady, whose Cantonese name translates to "Rich Woman," has a different customer in mind: wealthy locals whose money is tied up—sometimes literally—in a luxury accessory [...] Angel Yam, a white-collar office worker, says she doesn't really care if she gets back the Chanel purse she recently traded in for a total of roughly US$1,550. "I have too many idle handbags at home," she said. "I don't feel any loss when I take some of them as collateral for loans."

So there is a shallow, materialistic culture at work here among status-seeking handbag collectors and the cottage industry dedicated to serving them, but I'm rather more impressed by the financial innovation it has spawned in one of the world's most cutthroat of capitalist societies.

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House Demolitions or the Detroitification of Spain

A chair is still a chair
Even when there's no one sittin' there
But a chair is not a house
And a house is not a home
When there's no one there to hold you tight
And no one there you can kiss goodnight...

As the late Luther Vandross explained, a house is not a home. Unoccupied houses--whether deserted or incompletely finished--blight the developed world. In the benighted American wasteland of Detroit, they have been bulldozing more and more unoccupied homes, and this phenomenon now stretches to parts of Japan. Meanwhile, we have a related occurrence in Spain. Alike the US, Spain experienced a housing boom in mid- to late-2000s, fuelled by expectations of ever-rising prices and easy credit (especially from German banks plunking their euros in these "investments"). Years and years of stagnation have left Spain with--you guessed it--thousands ofnd thousands of unoccupied houses.

How do you correct this oversupply of partially built, unoccupied houses that will probably never be completed that are dragging down market prices? It's the same solution the world over, whether in Detroit or Daisen. Namely, demolish those houses: 

Sareb, the unit holding soured real estate assets from Spain’s nationalized banks, orders work to stop on about 160 of the 650 partially-completed building projects on its books and decides which ones are worth completing. A small number of them may be demolished, said two people with knowledge of the matter, who asked not to be identified by name because it isn’t public.

“We expect the bad bank will start to seek bids for some demolition projects starting this summer,” said Anka, chairman of Madrid-based Anka Demoliciones and vice-chairman of the Spanish Association of Demolition Businesses.

Spain is counting the cost of the collapse of a decade-long property boom that’s sent home prices falling about 30 percent since the start of 2008, driven unemployment to 26 percent and burdened banks with mounting bad loans that have made them wary of extending new credit. A decision by Sareb to raze unfinished properties would demonstrate it makes more sense to knock down homes than try to sell them as an economic slump drags into a sixth year, said Fernando Rodriguez de Acuna, a project manager at Madrid-based real estate consultant RR de Acuna & Asociados.

It's going to be game over in a short while, too. They're just houses, not homes.

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Depopulation or the Detroitification of Japan

There is a spectre haunting the developed world--the spectre of Detroitification. (Take that, Marx and Engels!) It involves depopulation and industrial hollowing out destroying the tax base of locales barely able to provide basic public services. Aside from the highly questionable logic of Japan incurring more debt to "cure" problems arguably caused by an oversized debt overhang, I have a more fundamental doubt about its economy moving forward. Simply, demographics dictate that an ever-shrinking population places nearly-insurmountable pressure on enfeebling the economy. Too many seniors drawing on too many benefits compared to too few working-age persons--it's a bad situation only set to get worse:

The estimate shows that Japan’s population in 2040 will stand at 107.276 million, a decline of about 20 million from 2010′s 128.057 million. A January 2012 estimate by the same [National Institute of Population and Social Security Research] institute had shown that in 2060, Japan’s population will number 86.737 million, about 30 percent less from the 2010 level.

Japan has been experiencing a natural population decrease since 2007, with annual deaths topping births. In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels. Although the public sector has been taking steps to make it easier for women to have more children, it will be extremely difficult to improve the situation.

While industrial stagnation is perhaps less evident in Japan at the moment, the fiscal implications of these hollowed-out societies remain the same. There are already signs of Detroit-esque lapses in the provision of public services emerging:

The progress in the graying of the nation means that the need for social services for residents such as medical and nursing care services will increase. The population decrease means that the nation’s total tax revenues will decline. As a result, grants from the central government to local governments will diminish. Both the central and local governments must find ways to overcome the imbalance between revenues and outlays. It will become all the more important for both the public and private sectors to increase chances for women to fully utilize their abilities in the workforce.

The effects of a population decrease are already being felt. Cases in which road bridges have been closed to traffic because of a lack of funds for maintenance and a drop in the number of users are increasing. Forests exist whose owners are now unknown. The number of vacant houses are increasing. Some municipalities have passed by-laws under which they will demolish vacant houses that have become dangerously dilapidated [my emphasis].

The spectre of Detroitification is hard to beat, and its footprints are unmistakeable.With current leader Shinzo Abe unwilling to consider meaningful migration reform as a solution thus far, it's the Motor City writ large and not Godzilla that's looming ominously in Japan's skyline.

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If I Were On Drugs, I'd Do Ratings Like Moodys

So, just how "moody" is Moodys? For reasons I'll explain, it makes me want to take large amounts of hallucinogens to acquire their "expertise." The global financial crisis revealed that, if anything, major credit rating agencies are not trustworthy. Conflicts of interest and plain negligence abounded. When push comes to shove, it's ultimately up to us to perform due diligence on prospective investments and not have some self-proclaimed rating agency do the job (poorly) for us.

This introduction brings me to the Philippines seeking to complete all major credit rating agencies giving it an "investment grade" designation. On March 27 of this year, Fitch granted the country such a rating after waiting for it for quite some time. On May 2, Standard and Poors followed suit in doing so. All this leaves just Moodys to grant the Philippines such a designation.

During the past week, Moodys people were in Manila assessing what rating to give the Philippines. These discussions were somewhat ridiculous given how low yields are on Philippine sovereign debt. If we take international capital markets as our gauge of investor perceptions of trustworthiness, the Philippines' performance is laudable: In case you're wondering, 10-year Philippine bonds are yielding lower than solidly investment grade nations that have been considered as such for a long time including Israel, Australia, Poland, New Zealand, Chile and Mexico. (And no, the government isn't faking low yields by buying its own papers alike certain governments.) The real question to me isn't whether the Philippines is investment grade but rather why its credit rating isn't higher.

And here's the kicker: The Moodys folks are questioning the government's "failure" to spend all of its budget within the fiscal year. Last I checked, it was called "coming in under budget." Correct me if I'm wrong, but in this era of trillion-dollar American deficits, isn't this a rather desirable outcome?

The government’s failure to spend its budget within schedule will be one of the main issues to be discussed in meetings between state economic managers and representatives from Moody’s Investor Service this week. Moody’s representatives are in Manila as part of the debt watcher’s process in reviewing the Philippines’ sovereign credit rating.

Moody’s still considers long-term peso and dollar bonds issued by the Philippine government as “junk” investments. The firm’s peers, Standard & Poor’s and Fitch Ratings, already rate the Philippines at investment grade. “Funding is not the issue. The issue is capacity to spend the money,” Moody’s senior analyst Christian de Guzman said Monday. 

You apparently don't need an understanding of finance to work for Moodys. Heck, if I took lots of drugs, I'd prolly work for Moodys, too. For them, true-to-life market evaluations don't matter--and underspending is "bad."

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Screw Panama; Chinese & $40B 'Nicaragua Canal'

It's been a long time since we've had a video feature, but now is as good a time as any. Recently, a young Chinese telecoms magnate came to an arrangement with the (rather impoverished) Nicaraguan government to develop a Panama Canal alternative slicing through that Central American republic:

Wang Jing, a 40-year-old Chinese telecommunications billionaire, has emerged as the next mogul to give it a go. Nicaraguan President Daniel Ortega, who fought the U.S.-backed contras in the 1980s, signed a 50-year concession on June 14 that grants Wang’s HK Nicaragua Canal Development Investment Co. (HKND) rights to develop a $40 billion project that includes a canal, an oil pipeline, two deepwater ports, an interoceanic railroad, and two airports.

Apart from his youth, question marks surround whether a telecoms guy knows anything about infrastructure development. Certainly there is no lack of such projects in the PRC--it just so happens that Wang has no experience with any of them. So obscure is this guy that the Nicaraguan leader even described him as a "ghost" during the signing ceremony:

Wang, whose HKND Group launched its website just days prior to the concession signing, is relatively unknown. “Why Wang Jing?” asks Margaret Myers, China and Latin America program director of Inter-American Dialogue, a Washington research group. “He has no experience in canals or large infrastructure projects. He is a telecommunications guy in China.”

Wang is chairman of more than 20 enterprises in 35 countries, including Beijing Xinwei Telecom Technology, according to the website. He’ll be owner and chief executive officer of HKND, which describes itself as an international infrastructure developer that will design, build, and operate the canal, its first project. “Here is the ghost,” Ortega said when Wang appeared to sign the concession on June 14. “He’s flesh and bone.”

Still, there is a commercial oportunity here insofar as cargo ships become larger and larger. Pretty soon, the Panama Canal may no longer be able to handle all the volume passing through:

The project comes as Panama prepares to finish a $5.25 billion expansion of its 99-year-old canal. On June 20, Honduras announced plans to work with a Chinese company on an Atlantic-to-Pacific railroad to boost trade across the Central American isthmus. “I think it is the right time now given the expanded ship sizes out there,” says Bill Wild, a former deputy CEO of Australia-based contractor Leighton Holdings (LEI:AU) and HKND’s chief project adviser. “Even the Panama Canal can’t come close to handling the big ships being built.” The Panama Canal Authority refutes this.

Despite the understandable scepticism, it will be interesting to watch whether this is a work of genius or a boondoggle on the part of the Nicaraguans in placing their bets on an unknown quantity.

UPDATE: It seems Ortega and Wang have already disagreed in public over the canal's route. Once more, I am not so optimistic about it coming true since so many grand plans to build this canal have been mooted over several decades.

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