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Dow 5,000 Redux
Bill Gross | December 2008
Investment Outlook
Here I go again! Gosh it was only six years ago that I cemented my place
in stock market history by predicting that the Dow would fall from 8,500
to 5,000, instead of going up to 14,000 where it peaked in October of
2007. Well, I could use the standard set of excuses: 1) No one else saw
it coming, 2) I was misinterpreted, and taken out of context, 3) I was
tired, overworked, and had family problems, or 4) I had just come out of
rehab. But these days what really works is a full confession. I mean,
like, uh, it was totally my fault and I take full responsibility. The
fact is I was only off by 9,000 points. That’s my story, and I’m stickin’
to it.
Well, fools rush in. This time though I’m definitely older and maybe a
little bit wiser. No magic number, nor a specific target date from the
Swami of the Dow. This one will be more conceptual, but still present a
“take” that you can criticize or damn with faint praise. And no, despite
the title, it doesn’t imply that the stock market is headed to 5,000 and
that I was always right or just a little bit early. It only suggests
that I’m readdressing the critical topic of equity valuation – that
mysterious fragile flower where price is part perception, part
valuation, and part hope or lack thereof. Press on, Swami.
Let me first announce a fundamental premise with which I think all
rational investors would agree: I believe in stocks for the long run –
but only if purchased at the right price. That statement packs a real
punch. It says that capitalism is and will remain a going concern, that
risk-taking – over the long run – will be rewarded, but only from a
starting price that correctly anticipates the economy’s growth and its
share of after-tax corporate profits within it. Acknowledging the above,
let’s look at a few basic standards of valuation that historically have
stood the test of time, to see if at least the price is right.
One of them is what is known as the “Q” ratio, or the value of the stock
market relative to the replacement cost of net assets. The basic logic
behind “Q” is that capitalism works. If the “Q” is above 1.0, then the
market is valuing a company at more than it costs to reproduce it; stock
prices should fall. If it is below 1.0, then stocks are undervalued
because new businesses can’t be created at as cheap a price as they can
be bought in the open market. In the short run, this ratio is volatile
as shown below but it tends to be mean reverting, which is critical. As
long as capitalism is a going concern, “Q” should mean revert to 1.0. If
so, then oh, oh what a “Q”! Today’s Q ratio has almost never been lower
and certainly not since WWII, implying extreme undervaluation, as seen
in Chart 1.
Another long-term standard of valuation comes from the good ol‘ P/E
ratio, where earnings per share, or E, is compared as a function of P,
or price. Chart 2, going all the way back to 1871, shows the same
relatively massive undervaluation, not only in the U.S. but elsewhere.
This has been a global bear market. Yet here one should be careful. The
sage of rationality, Yale’s Robert Shiller, cautions us to look at
earnings on an historical 10-year moving average to remove adverse or
fortuitous cyclicality. When measured on this basis, P/E’s are cheap but
less so, slightly below their mean average for the past century.
Professor Shiller may be on to something, although even his 10-year
approach may not be enough to adjust for our future economy and its
functioning within the context of a delevering as opposed to a levering
financial system. Recent Investment Outlooks and indeed, discussions in
PIMCO’s Investment Committee and Secular Forums for the past several
years have pointed to the necessity to view current changes as not only
non-cyclical, but non-secular. They are, in fact, likely to be
transgenerational. We will not go back to what we have known and gotten
used to. It’s like comparing Newton and Einstein: both were right but
their rules governed entirely different domains. We are now morphing
towards a world where the government fist is being substituted for the
invisible hand, where regulation trumps Wild West capitalism, and where
corporate profits are no longer a function of leverage, cheap financing
and the rather mindless ability to make a deal with other people’s
money. Welcome to a new universe stock market investors! In this rather
“sheepish” as opposed to “brave” new world, here are some considerations
that may affect Q ratios, P/E’s, and ultimately stock prices for years
to come:
1) Corporate profits have been positively affected for at least the past
several decades by several trends that appear to be reversing. Leverage
and gearing ratios – the ability of companies to make money by making
paper – are coming down, not going up. In addition, the availability of
cheap financing – absent government’s checkbook – will likely not
return. Narrow yield spreads and low real corporate interest rates are
gone. Last, but not least, the historical declines of corporate tax
rates, shown graphically in Chart 3, will not likely continue downward
in a Democratically-dominated Washington.
2) Globalization’s salutary growth rate of recent years may now be
stunted. While public pronouncements from almost all major economies
affirm the necessity for increased trade and policy coordination, and
avoiding the destructive tendencies of one-off currency devaluations as
a local remedy for global problems, investors should not bank on the
free trade mentality of recent years to support historic growth rates.
Already we are seeing separate ad hoc policy responses with very little
cooperation. Not only does the EU’s approach differ from that of the
U.S., but France is in many ways an odd man out within its own
community. Asia is legitimately suspicious of any U.S. endorsed approach
given the failure of America’s capitalistic model.
3) Animal spirits, and with them the entrepreneurial dynamism of
risk-taking has likely experienced a body blow. Not only have dancers on
the financed-based dance floor been shown the exit à la Chuck Prince,
but those that remain have been publicly chastened and handcuffed.
Golden parachutes, options, executive compensation and bonuses
themselves are now at risk. Care to climb to the throne of this new
world? Well, yes, egos will always dominate, but the rules will be
changed and hormone levels lowered. Bill Gross | December 2008
4) The benevolent fist of government is imperative and inevitable, but
it will come at a cost. The champion of free enterprise, Ronald Reagan,
knew that growth of the private sector was in no small way dependent on
deregulation and the lowering of tax rates. Now that those trends have
necessarily come to an end, no rational investors should expect
innovation and productivity to be unaffected. Profit and earnings per
share growth will suffer.
My transgenerational stock market outlook is this: stocks are cheap when
valued within the context of a financed-based economy once dominated by
leverage, cheap financing, and even lower corporate tax rates. That
world, however, is in our past not our future. More regulation, lower
leverage, higher taxes, and a lack of entrepreneurial testosterone are
what we must get used to – that and a government checkbook that allows
for healing, but crowds the private sector into an awkward and less
productive corner. Dow 5,000? We don’t have to go there if current
domestic and global policies are focused on asset price support and
eventual recapitalization of lending institutions. But 14,000 is a
stretch as well. One only has to recognize that roughly 20% of bank
capital is now owned by the U.S. government and that a near
proportionate share of profits will flow in that direction as well.
Better to own corporate bonds than corporate stocks, but that’s a story
for another Investment Outlook. Bill Gross | December 2008
Bailout Monitor Sees Lack of a Coherent Plan
By DIANA B. HENRIQUES
Published: December 1, 2008
The head of a new Congressional panel set up to monitor the gigantic
federal bailout says the government still does not seem to have a
coherent strategy for easing the financial crisis, despite the billions
it has already spent in that effort.
Elizabeth Warren, the chairwoman of the oversight panel, said in an
interview Monday that the government instead seemed to be lurching from
one tactic to the next without clarifying how each step fits into an
overall plan.
“You can’t just say, ‘Credit isn’t moving through the system,’ ” she
said in her first public comments since being named to the panel. “You
have to ask why.”
If the answer is that banks do not have money to lend, it would make
sense to push capital into their hands, as the Treasury has been doing
over the last two months, she continued. But if the answer is that their
potential borrowers are getting less creditworthy with each passing day,
“pouring money into banks isn’t going to fix that problem,” she said.
The new panel has held only a few briefings with Treasury officials so
far, and Ms. Warren acknowledged that she and the other panel members
were still in the early stages of their research.
Treasury Department officials have never described their actions as the
sole remedy. A spokesman noted that Secretary Henry M. Paulson Jr.
recently testified that stabilizing the financial system was a necessary
first step in any plan to address the financial and economic crisis.
“Our objectives in asking Congress for a financial rescue package were
to first stabilize a financial system on the verge of collapse, and then
to get lending going again to support the American people and
businesses,” Mr. Paulson said at one recent hearing. “If the financial
system were to collapse, it would significantly worsen and prolong the
economic downturn.”
A Harvard law school professor and a consumer bankruptcy expert, Ms.
Warren was named by Senate Majority Leader Harry Reid to the new
five-member panel, created as part of the $700 billion Troubled Asset
Relief Program, known as TARP, enacted in October. She was elected
chairwoman at the group’s first meeting last Wednesday.
In that role, she will have a strong voice in shaping the mission of the
panel and the content of the regular reports it will deliver to Congress
as long as the TARP exists.
The panel’s power, as sketched out in the law, extends a bit beyond the
“bully pulpit” but falls far short of a veto over specific proposals or
programs. Its main source of influence is that it will have the ear of
lawmakers who can tighten the bailout purse-strings or rewrite its
charter.
“Good ideas produce their own power,” Ms. Warren said. “If we have good
ideas, it will be a powerful series of reports. If we don’t, it won’t.”
Like much of the public, lawmakers “have just been stunned by these
economic and financial developments,” she said. “There wasn’t time even
to develop a coherent list of questions to ask Treasury about what it’s
doing and what it plans to do — and whether either of those are likely
to address what’s going wrong.”
She added: “Our role is to make sure that the right questions are asked
as early as possible.”
In that spirit, she promised that Congress would get the panel’s first
report on Dec. 10, “laying out the central questions that Treasury
should be addressing as it spends the taxpayers’ money.”
Meetings with Treasury officials so far have made her question whether
they understand that “household financial health is profoundly tied to
the economic health of the nation,” she said. “You cannot repair this
economy if you can’t repair those families, and I’m not sure the people
directing the bailout see that as their job.”
In her view, the government should be trying to create more reliable
customers for those banks by shoring up the fragile finances of the
millions of American families that could not save, borrow or spend even
if their banks were flush with capital.
“Any effective policy has to start with the households,” she said.
“Years of flat wages, low savings and high debt have left America’s
households extremely vulnerable.”
Ms. Warren, on the law faculty at Harvard since 1995, has written
extensively and testified frequently before Congress on consumer credit
laws and personal bankruptcy reform. She has been a member of several
government advisory panels addressing consumer finance issues, and is
the co-author of “The Two-Income Trap: Why Middle-Class Mothers &
Fathers Are Going Broke” (Basic Books, 2003).
Ms. Warren will also be responsible for getting the panel up and running
quickly and steering it around the two other monitors put in place by
the legislation, the Government Accountability Office, whose first
report on the bailout is due Tuesday, and a special inspector general
who is not yet on the job. (Neil M. Barofsky, a veteran federal
prosecutor in Manhattan, has been nominated by the White House but is
still awaiting Senate confirmation.)
The specific bailout investments, transactions and employment decisions
need to be monitored closely to make sure they are appropriate and
ethical, she said. “But we need to draw a distinction between policy
oversight and procedural oversight,” she added. “I see our role as lying
more in the policy realm, so I don’t think we duplicate those efforts.”
The panel is also required by law to provide Congress with
recommendations for reforms to the financial regulatory structure, a
report that she said it would deliver by Jan. 20.
Despite Ms. Warren’s ambitious timetable, the new Congressional panel is
having a bumpy start.
Created with the law’s passage on Oct. 3, it existed only in theory
until Nov. 14, when its first three members were appointed by the
Democratic leadership in Congress. Besides Ms. Warren, they are Damon
Silvers, an associate general counsel of the AFL-CIO and the panel’s new
deputy chairman, and Richard H. Neiman, the state superintendent of
banks for New York.
On Nov. 19, the Republican leaders in the House and Senate selected
Representative Jeb Hensarling of Texas and Senator Judd Gregg of New
Hampshire to fill out the panel.
But on Monday, Senator Gregg, who is also the ranking Republican on the
Senate Budget Committee, announced that he “will need to step aside from
this effort.” He cited the legislative burden facing the Senate,
specifically “an extremely large stimulus package” and “the ongoing
issues of developing fiscal policy relative to the budget.”
Aides to Senator Mitch McConnell, the Republican leader in the Senate,
said his office expected to announce a successor soon.
Ms. Warren said she regretted his absence but still expected the panel
to meet its deadlines.
This article has been revised to reflect the following correction:
Correction: December 3, 2008
An article on Tuesday about Elizabeth Warren, the new chairwoman of a
Congressional panel overseeing the financial bailout program, misstated
the name of another agency also responsible for monitoring the program.
It is the Government Accountability Office, not the General
Accountability Office.
Every Trick in the Book
by Mike Whitney
December 2nd, 2008
Conditions have deteriorated on a scale and with a speed that no one
could have predicted just a few months ago. Market conditions of
unprecedented strength are roiling the world’s financial markets. The
global economy is either in, or close to, recession and 2009 is not
likely to be a year of great recovery.
– Brett White, chief executive officer of CB Richard Ellis, LA Times
Without any public debate or authorization from Congress, the Federal
Reserve has embarked on the most expensive and radical financial
intervention in history. Fed chairman Ben Bernanke is trying to avert
another Great Depression by flooding the financial system with liquidity
in an attempt to mitigate the effects of tightening credit and a sharp
decline in consumer spending. So far, the Fed has committed over $7
trillion, which is being used to backstop every part of the financial
system including money markets, bank deposits, commercial paper (CP)
investment banks, insurance companies, and hundreds of billions of
structured debt-instruments (MBS, CDOs). America’s free market system is
now entirely dependent on state resources.
With interest rates at or below 1 percent, Bernanke is “zero bound”,
which means that he will be unable to stimulate the economy through
traditional monetary policy. That leaves the Fed with few choices to
slow the debt-deflation that has already carved $7 trillion from US
stock indexes and another $6 trillion from home equity. Bernanke will
have to use unconventional means to stabilize the system and maintain
economic activity in the broader economy.
Last Tuesday, Treasury Secretary Henry Paulson announced that the Fed
would buy $600 billion of toxic mortgage-backed securities (MBS) from
Fannie Mae and Freddie Mac, in effect, buying up its own debt. This is
one of the unconventional strategies that Bernanke outlined in a speech
he gave in 2002 on how to avoid deflation. By moving the MBS from
Fannie’s balance sheet to the Fed’s, Bernanke was able down interest
rates by a full percentage point overnight, creating a powerful
incentive for anyone thinking about buying a home. But Bernanke’s plan
is not risk free; it increases the Fed’s long-term liabilities, which in
turn undermines the dollar. This calls into question the
creditworthiness of the US Treasury, which is becoming more and more
uncertain every day.
The Fed also initiated a program to purchase $200 billion of triple
A-rated loans from non-bank financial institutions to try to revive the
flagging securitization market. It’s another risky move that ignores the
fact that investors are shunning “pools of loans” because no one really
knows what they are worth. The appropriate way to establish a price for
complex securities in a frozen market is to create a central
clearinghouse where they can be auctioned off to the highest bidder.
That establishes a baseline price, which is crucial for stimulating
future sales. But the Fed wants to conceal the true value of these
securities because there are nearly $3 trillion of them held by banks
and other financial institutions. If they were priced at their current
market value ($.21 on the dollar) then many of the country’s biggest
banks would have to declare bankruptcy. So the Fed is trying to maintain
the illusion of solvency by overpaying for these securities and
providing the financing companies more capital to loan to businesses and
consumers. Once again, the Fed is stretching its balance sheet by trying
to resuscitate a structured finance system that has already proved to be
dysfunctional.
Bernanke would be better off letting the market decide what these
debt-instruments are really worth. There are always buyers if the price
is right. Just look at what happened in Southern California last month,
where there was a shocking turnaround in the housing market. Home sales
in Orange Country shot up 55 percent year over year in October. That’s
because prices have dropped 36 percent from their peak in 2007. This
proves that real estate — like complex securities — will recover when
investors feel that prices are fair.
Does Bernanke really believe that his maneuvering will change the
direction of the market or convince investors to pay full-price for
dodgy securities?
Who knows, but we do know that the Fed has no mandate to prop up asset
values, which the market has already decided are worth considerably
less. It’s the equivalent of price fixing.
Bernanke’s Bag O’ Tricks
In the coming weeks, the Fed chairman will probably employ many of the
radical policy options he laid out in his 2002 speech. Economist Nouriel
Roubini points out that nearly all of these choices “imply serious risks
for the Fed” as well as the American people. Roubini says:
“Such risks include the losses that the Fed could incur in purchasing
long term private securities, especially high yield junk bonds of
distressed corporations . . . . Pushing the insolvent Fannie and Freddie
to take even more credit risk may be a reckless policy choice. And
having a government trying to manipulate stock prices would create
another whole can of worms of conflicts and distortions.
Finally, the Fed could try to follow…massive quantitative easing;
flooding markets with unlimited unsterilized liquidity; talking down the
value of the dollar; direct and massive intervention in the forex to
weaken the dollar; vast increase of the swap lines with foreign central
banks… aimed to prevent a strengthening of the dollar; attempts to
target the price level or the inflation rate via aggressive preemptive
monetization; or even a money-financed budget deficit.” (Nouriel
Roubini’s EconoMonitor)
Last Tuesday’s announcement suggests that Bernanke may be dabbling in
the stock market already. This forces anyone who is planning to short
the market to reconsider his strategy because Bernanke could be secretly
betting against him by dumping billions in the futures market to keep
stocks artificially high. It just goes to show that all the bloviating
about the virtues of “free market” is just empty rhetoric. When push
comes to shove this is “their” system and they’ll do whatever they can
to preserve it. If that means direct intervention, so be it. Principles
mean nothing.
Bernanke’s actions are likely to wreak havoc in the currency markets,
too. If currency traders suspect that Bernanke is printing money
(“unsterilized liquidity”) to rev up the economy, there will be a
sell-off of US Treasuries and a run on the dollar. “Monetization” — the
printing money to cover one’s debts — is the fast-track to
hyperinflation and the destruction of the currency. It’s not a decision
that should be taken lightly. And it is not a decision that should be
made by a banking oligarch who has not been given congressional
approval. Bernanke’s shenanigans show an appalling contempt for the
democratic process. He needs to be reigned in before he does more
damage.
Bernanke’s attempts to revive the securitization market is
understandable, but it probably won’t amount to anything. The well has
already been poisoned by the lack of regulation and the proliferation of
subprime loans. The problem is that the broader economy needs the credit
that securitization produced via the non bank financials (investment
banks, hedge funds etc) In fact, the non bank financial institutions
were providing the lion’s share of the credit to the financial system
before the meltdown. But, now that the five big investment banks are
either bankrupt or transforming themselves into holding companies (and
the hedge funds are still deleveraging) the only option for credit is
the banks, and they are incapable of filling the void. The Wall Street
Journal estimates that the loss of Bear Stearns and Lehman Bros. will
mean “$450 billion in lending capacity missing from markets”. Think
about that. If we include the other investment banks in the mix, then
more than $2 trillion in credit will vanish from the system next year
alone. Bottom line, the breakdown in securitization is choking off
credit and pushing the country towards catastrophe. If the slide
continues, there could be a 40 percent reduction in credit in 2009
making another great Depression unavoidable.
Does that mean we should revive the failed system?
No, just the opposite. The markets need to be re-regulated now to
restore credibility. But the Fed should looking for ways to create an
emergency National Bank, which operates like a public utility, so that
credit can be made available to businesses and consumers who need it
now. The Treasury should also be working with Congress on a plan for
public education to forestall a panic as well as recommendations for
stimulus to soften the economic hard landing just ahead.
The financial system is broken and institutions will not be able to
releverage fast enough to normalize the credit markets or stop the
impending collapse in consumer demand. What’s needed is a constructive
plan to rebuild the system while minimizing the suffering of normal
people. There’s no sense in trying to put the genie back in the bottle
or re-energize a failed system. What’s past is prologue. There needs to
be a serious analysis of the factors that led to the present crack-up
and a plan for course-correction. It’s not enough to throw stones at the
Fed and its misguided serial bubble-making escapades.
Reagan’s Legacy
Our present dilemma can be traced back to the 1980s — the Reagan era —
and the rise of an organized, industry-funded movement, which advanced
their business-friendly, “trickle down” ideology which, when put into
practice, has led to greater and greater income disparity, unprecedented
expansion of credit and, ultimately, economic disaster.
The problem is the way that the system has been reworked to serve the
interests of the investor class at the expense of working people. As
Wall Street has tightened its grip on the political parties, more of the
nation’s wealth has gone to a smaller percentage of the population while
the chasm between rich and poor has grown wider and wider. The United
States now has the worst income and wealth disparity since 1929 and a
whopping 75 percent of the labor force has seen a drop in their living
standard since 1973. The average American has no savings and a pile of
bills he is less and less able to pay. Apart from the ethical questions
this raises, there is the purely practical matter of how a
consumer-driven economy (GDP is 70% consumer spending in US) can
maintain long-term growth when wages do not keep pace with productivity.
It’s simply impossible. The only way the economy can grow is if wages
are augmented with personal debt; and that is exactly what has happened.
The fake prosperity of the Bush and Clinton years can all be attributed
to the unprecedented and destabilizing expansion of personal debt. Wages
have been stagnate throughout.
The architects of the present system knew what they were doing when they
cooked up their supply side theory. They were creating the rationale for
shifting wealth from one class to another. But the theory is deeply
flawed as the current crisis proves. Economic conditions do not improve
when the rich get richer. All boats do not rise. Class divisions
intensify and imbalances grow. Equity bubbles may be an effective means
of social engineering, but they always lead to disaster. In fact, the
crash of the Fed’s massive debt bubble could bring down the whole system
in heap. There are better ways to allocate resources so that everyone
benefits equally.
It all gets down to wages, wages, wages. If wages don’t grow, neither
will the economy. Author Ravi Batra sums it up like this in his book
Greenspan’s Fraud:
“A bubble economy is born when wages trail productivity for some time
and result in ever-rising debt. Then profits grow faster than
productivity gains, and share prices outpace GDP growth. However, a time
comes when debt-growth slows down, and demand falls short of output,
resulting in profit decline and a stock market crash. Thus, the very
force that generates the stock market bubble seeds its crash.”
(Greenspan’s Fraud: Ravi Batra, Palgrave Macmillan, p 152)
The “trickle down” Voodoo economic model was destined to fail because it
was built on a fiction. Prosperity is not possible when workers are not
fairly compensated and wealth is not equitably distributed. Our focus
should be on creating a system that is sustainable, which means that the
needs of workers should take precedent over those of Wall Street.
CEO Confidence Index October 2008
Chief Executive online magazine
September/October 2008
Posted On: 11/6/2008
CEO Confidence plummets to a Historic Low. All Indicators Fall by
Unprecedented Amounts Following the Approval of the Bailout Plan
The CEO Confidence Index plummets 42.3 points to a record low of 58.2
points in October, based on a polling of 309 business executives by
Chief Executive magazine. Executives were surveyed between October 7 and
23, following the approval of the bailout plan.
Since the inception of the survey in October 2002, there has never been
such a sharp decline in all five indices simultaneously. Moreover, in a
tremendous contrast to last month where the Business Condition Index,
which measures current business temperament among executives,
experienced the highest gains amongst the five indices, it dropped 65.6
percent to 36.9 points.
“We have seen precipitous decline in CEO Confidence since last summer,
but we have never seen confidence drop so sharply and dramatically
during one polling cycle," said Edward M. Kopko, CEO and publisher of
Chief Executive magazine.
Reflecting the economy and the job market, 67.6 percent of CEOs believe
that employment will decrease over the next quarter. Over the past year,
the number of unemployed persons has increased by 2.2 million and the
unemployment rate has reached 6.1 percent. As such, Chief Executive
magazine predicts unemployment to reach 6.5 percent over the coming
months and may increase to as high as 7-8 percent based on recent
confidence readings.
The unemployment data supports the significant drop in both the Future
and Employment Confidence Indices, which decreased to their lowest
levels ever (51.6 percent and 49.4 percent, respectively), further
indicating that we have a tough job market ahead of us.
The Investment Confidence Index, which tracks capital spending at
corporations as well as CEO market confidence, was the most resilient in
October as it fell only 16.4 percent with 48 percent of respondents
saying they considered current investment conditions to be “bad.” Many
CEOs surveyed sense that the economy's troubles were a mix of public and
private concerns: "The next President needs to reduce federal spending
and the deficit - but not by further weakening the social safety net
which will be even more necessary in the next years."
CEO Index, October 2008
Respondents: 309
China Reserves to Pass $2 Trillion; Russia’s Fall: Chart of Day
By Lee J. Miller and Zhang Dingmin
Nov. 28 (Bloomberg) -- China’s foreign-exchange reserves may top $2
trillion for the first time by the end of this year, giving the world’s
most-populous nation more firepower to stimulate its economy during a
global recession.
China’s holdings increased 25 percent in the first nine months of the
year to stand at $1.906 trillion on Sept. 30. Reserves shrank in Japan
and Russia, the nations with the second- and third-largest stockpiles.
Russia drained a quarter of its currency and gold assets in less than
four months to prop up the ruble, which has dropped 14 percent since
June 30.
The CHART OF THE DAY compares the reserves of China, Japan and Russia,
according to data compiled by Bloomberg and comments from government
officials. The $2 trillion milestone will “hopefully” be reached this
year, Yao Jingyuan, chief economist for the National Bureau of
Statistics, said yesterday.
China has been “building liquidity” with reserves increasing by more
than $470 billion this year, Morgan Stanley said in a report. “As China
goes, so will go Asia.”
China reported a record $35.2 billion trade surplus last month. Its
reserves surpassed those of Japan for the top spot in January 2006.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4KZyBSUoCbI
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China's currency reserves pass $1 trillion and likely to double to $2
trillion by 2010
Economics / Strategic News
Nov 08, 2006 - 04:37 PM
By: Nadeem_Walayat
China's currency reserves pass a record $1 trillion, and continue to
grow at a rate of $20 billions per month. China's reserves have grown
from 100billion in 1996 to $1 trillions today and are expected to double
to $2 trillions by 2010. Now China accounts for almost 20% of the
world's foreign exchange reserves, Japan being second with some $900
billions of reserves, also mostly in US dollars.
The reason for the growth in reserves is primarily due to the under
valuation of the Yuan which in turn is contributing to the large trade
deficit that the US is running.
China sees the $1 trillion reserve as insurance against economic
turbulence. Since the Asian financial crisis of 1997 and 1998, many
asian countries have stacked up large pools of reserves, to cushion
themselves against future shocks.
The consequences of these reserves is seen in U.S. government bond
market, where the price of the bonds has stayed high and -- because bond
prices and yields are inversely low resulting in low US interest rates,
(approx 70% of china's reserves are in US Bonds)! Any decision to
diversify into non U.S. holdings could have disastrous consequences for
the U.S. economy as it would result in a dramatic fall in he US dollar.
Foreign governments have charged that China has kept the value of the
yuan artificially low, which has made the price of its exports cheaper
in other countries. With the trade deficit running at some $18 billions
per month with China.
China is starting to aggressively use its cash stock pile to buy into
resources around the world, specifically Africa where trade has grown to
$40 billion. Chinese investment being poured into copper mines and oil
fields, helping to boost African economies. The buying is not limited to
resources, China is also buying hi technology imports such as the recent
deal to buy 150 airbus A320's.
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