Often Wrong, But Never In Doubt

Often Wrong, But Never In Doubt

Fall is here but the living is easy.  Contrary to many past September to October time frames, this past September and the first few days of October have been very pleasant for investors.

Several markets that we follow are at new highs, including Hong Kong, China, Brazil, India, Singapore and others.  Gold is at a multi-year high, oil is doing very well, as are base metals. Clearly, things are salutary for global investors…unless you are in mortgage debt and other related problem areas.  It seems obvious that, as predicted, investors have sought solace in global fast growing markets like those mentioned above.

Of course, one reason that all of these markets are doing well is that the U.S. dollar is doing so poorly.  When the dollar falls, many investors seek to protect themselves from a declining dollar by investing abroad or in commodities.
It can be fun to laugh at the foibles of others, but it’s not so much fun to be confronted by our own foibles.  Although we have had a good run of luck on our predictions for the last few years, I am sure we will someday miss a big one.  Thus, I offer the following with the assurance that we can be wrong.


A lot of western politicians are convinced that the emerging economies are all driven by exports, and this belief has found its way into the public perception of the world in the U.S. and Europe.
The fact that this is incorrect has little to do with its public acceptance.  In our opinion, this misconception is potentially very dangerous ("nothing exists, except believing makes it so") as it can cause problems worldwide.  If anti-free trade legislation is pushed and more free trade legislation is ignored, we run the danger of deeply damaging the world trade system, reducing economic growth, and damaging the rising standards of living globally.
Here are a few facts that people seem to either ignore or are ignorant of:
1. China’s growth is not coming from exports, it is mostly coming from domestic demand for goods, services and infrastructure (85% of their economic growth is domestic).
2. India’s imports exceed their exports.
3. The low and falling U.S. dollar will soon start to impact U.S. exports (by increasing them) and U.S. imports (by diminishing them).

In summary, people who are worrying about U.S. importing too much are fighting the last war….Those that think that as soon as if we curb our imports of toys from China and T-shirts from Pakistan, the U.S. industrial base will be reinvigorated.  Perhaps then, the world will buy shoes made in New England, textiles made in South Carolina, and autos made in Michigan….Unfortunately, this is highly unlikely to happen.  For example, Japanese cars cost more than comparable U.S. cars, and have for years…..but the Japanese sell more cars in much of the U.S. because they are perceived to be of better quality.  The same is true with Japanese consumer electronics and Korean ships, etc.

While it may be hard to admit, it looks like the best solution may be for U.S. and European consumers to learn to live within their means, consume less and import less of what they probably do not need.


These funds will provide a huge demand for stocks, bonds and commodities worldwide.  They total about $1.9 trillion currently and are expected to grow at $1.2 trillion per year, rising to almost $8 trillion by 2011.

Sovereign wealth funds exist so countries like those in the Middle East, Singapore, Russia, China and others can diversify their assets out of their home country and benefit from investing abroad to try and capture some global growth for their national funds.

Obviously, those countries with economic growth and positive current account balances and balance of payments are more likely to have larger and growing sovereign wealth funds.  It is believed that China will have half a trillion per year to add to their fund.

A few additional points on SWF’s:

  • These are generally not good for the U.S. dollar as the money will be exiting the dollar to be invested abroad.  It is positive for foreign currencies and gold.
  • The funds will go for growth assets, not just conservative assets.  They will invest in commodities and stocks as well as more conservative bonds.
  • Most of the money will be managed by outside managers, as most countries do not have the large investment management skill set to manage the funds internally.  So we look for the global investment management industry to get an additional several billion dollars of revenue per year.


QDII stands for qualified domestic institutional investors.  These companies are mainly insurance companies, banks and investment managers that are allowed to subscribe to new funds being organized to take money out of China for investment.  Although the public will not be allowed to invest abroad for a while yet, these institutions are getting a head start.

It is estimated by a major bank that these funds will total about $120-$180 billion in the next 12 months.  Half of which will go to Hong Kong (which would represent about 11 days trading volume) in the next year.

The big question: Will the money leaving China be accelerating or will the government stop the growth of these QDII’s?

It is our opinion that the QDII’s will grow as China has a huge problem with its stock market going up too much and too rapidly.  The QDII route is a way to send funds out of the country and cool off the red hot Chinese stock market where massive funds are chasing a limited number of stocks.


Prime Minister Singh has presided over a period of considerable growth in industrial production (an area where India historically has greatly lagged China).  Indian industrial production grew by 12.5% last year and 40% of top multinationals plan to start manufacturing in India by 2012.

This is a big need in a country where 14 million new workers enter the work force every year.  Economists believe that much more manufacturing must be done in India. 

Fifty years of Fabian socialism is gradually being dismantled to allow this to happen.  Because India is a democracy, and because the forces of radical socialism have important constituencies in India, the country has been torturously slow to abandon this absurdly ineffectual economic model, but finally, that is happening.


A client of ours who just returned from Asia shared some astute observations on this subject. Here is part of our response to his letter questioning if Asian countries share the same rule of law as Europe and North America

In our opinion, the perception of the rule of law exists in every country.  However, changing circumstances and unforeseen pressures often force governments or people in developed countries and in emerging economies to change the rules in the middle of the game.  People are protected to one extent or another by the laws that govern….until the laws are changed or are deemed unenforceable.
China has the rule of law, but their logic is different than ours.  Can it be OK to cheat a foreigner investor if it allows more Chinese to be employed…but not OK if it hurts the Chinese image or Chinese investors?  It’s a big country with a lot of different powerful influences.  A great book about doing business in China and all of its pitfalls is "Mr. China" by Tim Clissold.

In China, we have found that if we can choose investments where our clients’ best interests are congruent with the best interests of powerful (or numerous) Chinese interests, we are more likely to be profitable and avoid fraudulent or shady schemes.  In our experience, if you have no fellow investors who are Chinese, the investment is less likely to prosper.  We believe it is more problematic for Chinese to cheat a fellow Chinese than to cheat foreign investors.

For this reason, Chinese companies listed in Hong Kong or Singapore are better to own than those only listed in the U.S. or in Europe.  The best investments in our opinion, are those which trade in both China (at one price) and in Hong Kong or Singapore (at a much lower price for the exact same ownership percentage).

As for India, in our opinion India has good rule of law, but it is better to avoid family owned small companies.  In general, the big companies are too big to be petty, and do small dishonest things.  India has excellent accounting and a British style legal system, although court cases can take forever…up to 10 years or more.  We are actually more comfortable investing in big family companies or technologically driven companies run by a group of non-related Indian techies.

The most corrupt part of India is the civil service bureaucracy, so we try to avoid government owned companies.

Overall, we think China and India will continue to grow without any major problems….in great part because they both have to.  By this we mean they have to improve the standard of living of their constituents or lose power.  Both countries have seen what happened in the former Soviet Union, where the economy did not provide a rising standard of living for its people.  Eventually, after the people realized most everyone else on earth was making progress and they were mired in the status quo, the people voted with their feet.  They either left the countries or lobbied hard for a new type of government.

China will use its iron hand in a velvet glove approach to foster growth.  The fact that the China is producing a tangible increase in the standard of living for many hundreds of millions of its people buys it a lot of time.

India, is smart and well educated at the top.  Politics is notably backward in the countryside, but even there it is beginning to dawn on politicians that the Indian people will get a lot  richer by working with the west, and dismantling the absurd Fabian socialist economic structure that they erected after independence fifty plus years ago.

India’s social system and religious diversity is another consideration.  Interestingly enough, Prime Minister Singh is a Sikh, which is a non Hindu, non Muslim religion represented by only about 5% of the population.  India has been dealing with terrorism for about 700 years, so they have a lot of experience with the issue.

The bottom line is that increasing the standard of living for their populations is the only option for a government that desires any modicum of progress, harmony and increasing power.  We acknowledge that popular revolt and governmental change could easily take place in smaller countries, which is why we have stuck to more stable countries such as Singapore, India and China along with Korea and Japan for investments.

Thank you for listening.  Please contact us if we can be of service.

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