Belarus,MinskBelarus, officially the Republic of Belarus, is a landlocked country in Eastern Europe bordered by Russia to the northeast, Ukraine to the south, Poland to the west, and Lithuania and Latvia to the northwest. Its capital is Minsk; other major cities include Brest, Hrodna, Homiel, Mahilyow and Vitsebsk. Over forty percent of its 207,600 square kilometres is forested, and its strongest economic sectors are service industries and manufacturing. Until the 20th century, the lands of modern-day Belaru…morealsoRANKED#5OF 118The Best Countries to Meet Women#52OF 191The Most Disliked Countries In The World#152OF 189Prettiest Flags in the World
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Cameroon,YaoundéCameroon, officially the Republic of Cameroon, is a country in Middle Africa, in the west Central Africa region. It is bordered by Nigeria to the west; Chad to the northeast; the Central African Republic to the east; and Equatorial Guinea, Gabon, and the Republic of the Congo to the south. Cameroon’s coastline lies on the Bight of Bonny, part of the Gulf of Guinea and the Atlantic Ocean. The country is often referred to as “Africa in miniature” for its geological and cultural diversity. Natural …morealsoRANKED#32OF 55Reranking the 2013 FIFA World Rankings#110OF 118The Best Countries to Meet Women#76OF 191The Most Disliked Countries In The World#139OF 189Prettiest Flags in the World
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Chad,N’DjamenaChad, officially the Republic of Chad, is a landlocked country in Middle Africa, in the area of northeast Central Africa. It is bordered by Libya to the north, Sudan to the east, the Central African Republic to the south, Cameroon and Nigeria to the southwest, and Niger to the west. Chad is divided into multiple regions: a desert zone in the north, an arid Sahelian belt in the centre and a more fertile Sudanese savanna zone in the south. Lake Chad, after which the country is named, is the larges…more
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China,BeijingChina, officially the People’s Republic of China, is a sovereign state located in East Asia. It is the world’s most populous country, with a population of over 1.35 billion. The PRC is a single-party state governed by the Communist Party, with its seat of government in the capital city of Beijing. It exercises jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities, and two mostly self-governing special administrative regions. The PRC also claims Taiwan – w…morealsoRANKED#15OF 35The Best Countries to Adopt From#32OF 40The Best Countries for American Expats#70OF 118The Best Countries to Meet Women#2OF 191The Most Disliked Countries In The World
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Cuba,HavanaCuba, officially the Republic of Cuba, is an island country in the Caribbean. The nation of Cuba comprises the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the capital of Cuba and its largest city. The second largest city is Santiago de Cuba. To the north of Cuba lies the United States and the Bahamas are to the northeast, Mexico is to the west, the Cayman Islands and Jamaica are to the south, and Haiti and the Dominican Republic are to the southeast. The isl…morealsoRANKED#42OF 59The Countries with the Best Food#56OF 118The Best Countries to Meet Women#65OF 189Prettiest Flags in the World#100OF 191The Most Disliked Countries In The World
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Equatorial Guinea,MalaboEquatorial Guinea, officially the Republic of Equatorial Guinea, is a small country located in Central Africa, with an area of 28,000 square kilometres. It has two parts, an insular and a mainland region. The insular region consists of the islands of Bioko in the Gulf of Guinea and Annobón, a small volcanic island south of the equator. Bioko island is the northernmost part of Equatorial Guinea and is the site of the country’s capital, Malabo. The island nation of São Tomé and Príncipe is located…more
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Eritrea,AsmaraEritrea, officially the State of Eritrea, is a country in the Horn of Africa. Eritrea is the Italian form of the Greek name Ἐρυθραία, meaning “red [land]”. With its capital at Asmara, it is bordered by Sudan to the west, Ethiopia in the south, and Djibouti in the east. The northeastern and eastern parts of Eritrea have an extensive coastline along the Red Sea, across from Saudi Arabia and Yemen. The nation has a total area of approximately 117,600 km², and includes the Dahlak Archipelago and sev…more
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Ethiopia,Addis AbabaEthiopia, officially known as the Federal Democratic Republic of Ethiopia, is a country located in the Horn of Africa. It is bordered by Eritrea to the north and northeast, Djibouti and Somalia to the east, Sudan and South Sudan to the west, and Kenya to the south. With over 93,000,000 inhabitants, Ethiopia is the most populous landlocked country in the world, and the second-most populated nation on the African continent. It occupies a total area of 1,100,000 square kilometres, and its capital a…morealsoRANKED#16OF 35The Best Countries to Adopt From#58OF 59The Countries with the Best Food#104OF 118The Best Countries to Meet Women#71OF 191The Most Disliked Countries In The World
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Iran,TehranIran, also known as Persia, officially the Islamic Republic of Iran since 1980, is a country in Western Asia. It is bordered on the north by Armenia, Azerbaijan and Turkmenistan, with Kazakhstan and Russia across the Caspian Sea; on the east by Afghanistan and Pakistan; on the south by the Persian Gulf and the Gulf of Oman; on the west by Iraq; and on the northwest by Turkey. Comprising a land area of 1,648,195 km², it is the second-largest nation in the Middle East and the 18th-largest in the w…morealsoRANKED#5OF 16The Best Middle Eastern Countries to Visit#39OF 59The Countries with the Best Food#6OF 191The Most Disliked Countries In The World#59OF 189Prettiest Flags in the World
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Kazakhstan,AstanaKazakhstan, officially the Republic of Kazakhstan, is a contiguous transcontinental country in Central Asia, with its smaller part west of the Ural River in Eastern Europe. Kazakhstan is the world’s largest landlocked country by land area and the ninth largest country in the world; its territory of 2,727,300 square kilometres is larger than Western Europe. It has borders with Russia, China, Kyrgyzstan, Uzbekistan, and Turkmenistan, and also adjoins a large part of the Caspian Sea. The terrain of…morealsoRANKED#8OF 35The Best Countries to Adopt From#42OF 118The Best Countries to Meet Women#47OF 189Prettiest Flags in the World#89OF 191The Most Disliked Countries In The World
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Libya,TripoliLibya, officially the State of Libya, is a country in the Maghreb region of North Africa bordered by the Mediterranean Sea to the north, Egypt to the east, Sudan to the southeast, Chad and Niger to the south, and Algeria and Tunisia to the west. The three traditional parts of the country are Tripolitania, Fezzan and Cyrenaica. With an area of almost 1.8 million square kilometres, Libya is the 17th largest country in the world. The largest city and capital, Tripoli, is home to 1.7 million of Liby…more
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Madagascar,AntananarivoMadagascar, officially the Republic of Madagascar and previously known as the Malagasy Republic, is an island country in the Indian Ocean, off the coast of Southeast Africa. The nation comprises the island of Madagascar, as well as numerous smaller peripheral islands. Following the prehistoric breakup of the supercontinent Gondwana, Madagascar split from India around 88 million years ago, allowing native plants and animals to evolve in relative isolation. Consequently, Madagascar is a biodiversi…more
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Myanmar,NaypyidawBurma, officially the Republic of the Union of Myanmar, commonly shortened to Myanmar, is a sovereign state in Southeast Asia bordered by China, Thailand, India, Laos and Bangladesh. One third of Burma’s total perimeter of 1,930 kilometres forms an uninterrupted coastline along the Bay of Bengal and the Andaman Sea. Burma’s population of over 60 million makes it the world’s 24th most populous country and, at 676,578 square kilometres, it is the world’s 40th largest country and the second largest…morealsoRANKED#11OF 13The Best Asian Countries to Visit#117OF 118The Best Countries to Meet Women#127OF 191The Most Disliked Countries In The World#147OF 189Prettiest Flags in the World
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North Korea,PyongyangNorth Korea, officially the Democratic People’s Republic of Korea, is a country in East Asia, in the northern part of the Korean Peninsula. The capital and largest city is Pyongyang. North Korea shares a land border with China to the north and north-west, along the Amnok and Tumen rivers. A small section of the Tumen River also forms North Korea’s short border with Russia to the northeast. The Korean Demilitarized Zone marks the boundary between North Korea and South Korea. The legitimacy of thi…morealsoRANKED#43OF 43The Best Countries for Nightlife#64OF 118The Best Countries to Meet Women#3OF 191The Most Disliked Countries In The World#112OF 189Prettiest Flags in the World
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Rwanda,KigaliRwanda, officially the Republic of Rwanda, is a sovereign state in central and east Africa. Located a few degrees south of the Equator, Rwanda is bordered by Uganda, Tanzania, Burundi and the Democratic Republic of the Congo, and is oftentimes also considered part of Central Africa. Situated it in the African Great Lakes region, Rwanda is highly elevated; its geography is dominated by mountains in the west and savanna to the east, with numerous lakes throughout the country. Its climate is temper…more
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Sudan,KhartoumSudan, officially the Republic of the Sudan is a country in the Nile Valley of North Africa, bordered by Egypt to the north, the Red Sea, Eritrea and Ethiopia to the east, South Sudan to the south, the Central African Republic to the southwest, Chad to the west and Libya to the northwest. The Nile River divides the country into eastern and western halves. Its predominant religion is Islam. Sudan was the largest country in Africa and the Arab World until 2011, when South Sudan separated into an i…more
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Syria,DamascusSyria, officially the Syrian Arab Republic, is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the west, Turkey to the north, Iraq to the east, Jordan to the south and Israel to the southwest. A country of fertile plains, high mountains and deserts, it is home to diverse ethnic and religious groups, including Arab Alawites, Arab Sunnis, Arab Christians, Armenians, Assyrians, Druze, Kurds and Turks. Arab Sunnis make up the majority of the population. In English, the name…morealsoRANKED#11OF 16The Best Middle Eastern Countries to Visit#50OF 59The Countries with the Best Food#12OF 191The Most Disliked Countries In The World#136OF 189Prettiest Flags in the World
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Tunisia,TunisTunisia Arabic: الجمهورية التونسية al-Jumhūriyyah at-Tūnisiyyah; French: République tunisienne), is a country in the Maghreb region of North Africa. It is the smallest country in North Africa by land area and is bordered by Algeria to the west, Libya to the southeast and the Mediterranean Sea to the north and east. Tunisia is the northernmost country in Africa, with the northernmost point on the African continent, Ras ben Sakka. Tunisia contains the eastern streamers of the Atlas Mountains, whi…morealsoRANKED#8OF 10The Best Mediterranean Countries to Visit#118OF 191The Most Disliked Countries In The World#141OF 189Prettiest Flags in the World
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Turkmenistan,AshgabatTurkmenistan, formerly also known as Turkmenia, is one of the Turkic states in Central Asia. Turkmenistan is bordered by Afghanistan to the southeast, Iran to the south and southwest, Uzbekistan to the east and northeast, Kazakhstan to the northwest and the Caspian Sea to the west. Present-day Turkmenistan covers territory that has been at the crossroads of civilizations for centuries. In medieval times Merv was one of the great cities of the Islamic world, and an important stop on the Silk Road…more» more Turkmenistan(on 19 more lists, images, info & more)21
Uzbekistan,TashkentUzbekistan, officially the Republic of Uzbekistan is a landlocked country in Central Asia. Between 1924 and 1991, it was part of the Soviet Union. Once part of the Persian Samanid and later Timurid empires, the region which today includes the Republic of Uzbekistan was conquered in the early 16th century by nomads who spoke an Eastern Turkic language. This region was subsequently incorporated into the Russian Empire in the 19th century, and in 1924 it became a boundaried constituent republic of …morealsoRANKED#51OF 118The Best Countries to Meet Women#86OF 191The Most Disliked Countries In The World#96OF 189Prettiest Flags in the World
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Vietnam, officially the Socialist Republic of Vietnam, is the easternmost country on the Indochina Peninsula in Southeast Asia. With an estimated 90.3 million inhabitants as of 2012, it is the world’s 13th-most-populous country, and the eighth-most-populous Asian country. The name Vietnam translates as “Southern Viet”, and was first officially adopted in 1802 by Emperor Gia Long and again in 1945 with the founding of the Democratic Republic of Vietnam under Ho Chi Minh. The country is bordered b…morealsoRANKED#22OF 35The Best Countries to Adopt From#26OF 54The Best Countries to Travel Alone#103OF 118The Best Countries to Meet Women#70OF 189Prettiest Flags in the World
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Zimbabwe,HarareZimbabwe, officially the Republic of Zimbabwe, is a landlocked country located in southern Africa, between the Zambezi and Limpopo rivers. It is bordered by South Africa to the south, Botswana to the southwest, Zambia to the northwest and Mozambique to the east. The capital is Harare. Zimbabwe achieved de jure sovereignty from the United Kingdom in April 1980, following 14 years as an unrecognised state under the conservative white minority government of Rhodesia, which unilaterally declared ind…more
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According to Army Times, our Army is now concentrating on fighting in ‘megacities’ of 20 million or more people against “criminal and extremist groups” who can “influence the lives of the population while undermining the authority of the state.”
“It is inevitable that at some point the United States Army will be asked to operate in a megacity and currently the Army is ill-prepared to do so,” reported Army Chief of Staff Gen. Ray Odierno’s Strategic Studies Group.
The military isn’t allowed to serve as police on American soil, but once the jihadists Obama has been bringing into the U.S. via our open border commits serious acts of terror, expect that to be thrown out the window as America has already been declared a ‘battlefield’ per S.1867, or the National Defense Authorization Act (NDAA).
There are the largest cities as of 2015.
Submitted by Tyler Durden
The Burning Questions For 2015By Louis-Vincent Gave, Gavekal Dragonomics
With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.
1. A Chinese Marshall Plan?
When we have conversations with clients about China – which typically we do between two and four times a day – the talk invariably revolves around how much Chinese growth is slowing (a good bit, and quite quickly); how undercapitalized Chinese banks are (a good bit, but fat net interest margins and preferred share issues are solving the problem over time); how much overcapacity there is in real estate (a good bit, but – like youth – this is a problem that time will fix); how much overcapacity there is in steel, shipping, university graduates and corrupt officials; how disruptive China’s adoption of assembly line robots will be etc.
All of these questions are urgent, and the problems that prompted them undeniably real, which means that China’s policymakers certainly have their plates full. But this is where things get interesting: in all our conversations with Western investors, their conclusion seems to be that Beijing will have little choice but to print money aggressively, devalue the renminbi, fiscally stimulate the economy, and basically follow the path trail-blazed (with such success?) by Western policymakers since 2008. However, we would argue that this conclusion represents a failure both to think outside the Western box and to read Beijing’s signal flags.
In numerous reports (and in Chapters 11 to 14 of Too Different For Comfort) we have argued that the internationalization of the renminbi has been one of the most significant macro events of recent years. This internationalization is continuing apace: from next to nothing in 2008, almost a quarter of Chinese trade will settle in renminbi in 2014:
This is an important development which could have a very positive impact on a number of emerging markets. Indeed, a typical, non-oil exporting emerging market policymaker (whether in Turkey, the Philippines, Vietnam, South Korea, Argentina or India) usually has to worry about two things that are completely out of his control:
1) A spike in the US dollar. Whenever the US currency shoots up, it presents a hurdle for growth in most emerging markets. The first reason is that most trade takes place in US dollars, so a stronger US dollar means companies having to set aside more money for working capital needs. The second is that most emerging market investors tend to think in two currencies: their own and the US dollar. Catch a cab in Bangkok, Cairo, Cape Town or Jakarta and ask for that day’s US dollar exchange rate and chances are that the driver will know it to within a decimal point. This sensitivity to exchange rates is important because it means that when the US dollar rises, local wealth tends to flow out of local currencies as investors sell domestic assets and into US dollar assets, typically treasuries (when the US dollar falls, the reverse is true).
2) A rapid rise in oil or food prices. Violent spikes in oil and food prices can be highly destabilizing for developing countries, where the median family spends so much more of their income on basic necessities than the typical Western family. Sudden spikes in the price of food or energy can quickly create social and political tensions. And that’s not all; for oil-importing countries, a spike in oil prices can lead to a rapid deterioration in trade balances. These tend to scare foreign investors away, so pushing the local currency lower and domestic interest rates higher, which in turn leads to weaker growth etc…
Looking at these two concerns, it is hard to escape the conclusion that, as things stand, China is helping to mitigate both:
- China’s policy of renminbi internationalization means that emerging markets are able gradually to reduce their dependence on the US dollar. As they do, spikes in the value of the US currency (such as we have seen in 2014) are becoming less painful.
- The slowdown in Chinese oil demand, as well as China’s ability to capitalize on Putin’s difficulties to transform itself from a price-taker to a price-setter, means that the impact of oil and commodities on trade balances is much more contained.
Beyond providing stability to emerging markets, the gradual acceptance of the renminbi as a secondary trading and reserve currency for emerging markets has further implications. The late French economist Jacques Rueff showed convincingly how, when global trade moved from a gold-based settlement system to a US dollar-based system, purchasing power was duplicated. As the authors of a recent Wall Street Journal article citing Reuff’s work explained: “If the Banque de France counts among its reserves dollar claims (and not just gold and French francs) – for example a Banque de France deposit in a New York bank – this increases the money supply in France but without reducing the money supply of the US. So both countries can use these dollar assets to grant credit.” Replace Banque de France with Bank Indonesia, and US dollar with renminbi and the same causes will lead to the same effects.
Consider British Columbia’s recently issued AAA-rated two year renminbi dim sum bond. Yielding 2.85%, this bond was actively subscribed to by foreign central banks, which ended up receiving more than 50% of the initial allocation (ten times as much as in the first British Columbia dim sum issue two years ago). After the issue British Columbia takes the proceeds and deposits them in a Chinese bank, thereby capturing a nice spread. In turn, the Chinese bank can multiply this money five times over (so goes money creation in China). Meanwhile, the Indonesian, Korean or Kazakh central banks that bought the bonds now have an asset on their balance sheet which they can use to back an expansion of trade with China…
Of course, for trade to flourish, countries need to be able to specialize in their respective comparative advantages, hence the importance of the kind of free trade deals discussed at the recent APEC meeting. But free trade deals are not enough; countries also need trade infrastructure (ports, airports, telecoms, trade finance banks etc…). This brings us to China’s ‘new silk road’ strategy and the recent announcement by Beijing of a US$40bn fund to help finance road and rail infrastructure in the various ‘stans’ on its western borders in a development that promises to cut the travel time from China to Europe from the current 30 days by sea to ten days or less overland.
Needless to say, such a dramatic reduction in transportation time could help prompt some heavy industry to relocate from Europe to Asia.
That’s not all. At July’s BRICS summit in Brazil, leaders of the five member nations signed a treaty launching the US$50bn New Development Bank, which Beijing hopes will be modeled on China Development Bank, and is likely to compete with the World Bank. This will be followed by the establishment of a China-dominated BRICS contingency fund (challenging the International Monetary Fund). Also on the cards is an Asian Infrastructure Investment Bank to rival the Asian Development Bank.
So what looks likely to take shape over the next few years is a network of railroads and motorways linking China’s main production centers to Bangkok, Singapore, Karachi, Almaty, Moscow, Yangon, Kolkata. We will see pipelines, dams, and power plants built in Siberia, Central Asia, Pakistan and Myanmar; as well as airports, hotels, business centers… and all of this financed with China’s excess savings, and leverage. Given that China today has excess production capacity in all of these sectors, one does not need a fistful of university diplomas to figure out whose companies will get the pick of the construction contracts.
But to finance all of this, and to transform herself into a capital exporter, China needs stable capital markets and a strong, convertible currency. This explains why, despite Hong Kong’s pro-democracy demonstrations, Beijing is pressing ahead with the internationalization of the renminbi using the former British colony as its proving ground (witness the Shanghai-HK stock connect scheme and the removal of renminbi restrictions on Hong Kong residents). And it is why renminbi bonds have delivered better risk-adjusted returns over the past five years than almost any other fixed income market.
Of course, China’s strategy of internationalizing the renminbi, and integrating its neighbors into its own economy might fall flat on its face. Some neighbors bitterly resent China’s increasing assertiveness. Nonetheless, the big story in China today is not ‘ghost cities’ (how long has that one been around?) or undercapitalized banks. The major story is China’s reluctance to continue funneling its excess savings into US treasuries yielding less than 2%, and its willingness to use that capital instead to integrate its neighbors’ economies with its own; using its own currency and its low funding costs as an ‘appeal product’ (and having its own companies pick up the contracts as a bonus). In essence, is this so different from what the US did in Europe in the 1940s and 1950s with the Marshall Plan?
2. Japan: Is Abenomics just a sideshow?
With Japan in the middle of a triple dip recession, and Japanese households suffering a significant contraction in real disposable income, it might seem that Prime Minister Shinzo Abe has chosen an odd time to call a snap election. Three big factors explain his decision:
1) The Japanese opposition is in complete disarray. So Abe’s decision may primarily have been opportunistic.
2) We must remember that Abe is the most nationalist prime minister Japan has produced in a generation. The expansion of China’s economic presence across Central and South East Asia will have left him feeling at least as uncomfortable as anyone who witnessed his Apec handshake with Xi Jinping three weeks ago. It is not hard to imagine that Abe returned from Beijing convinced that he needs to step up Japan’s military development; a policy that requires him to command a greater parliamentary majority than he holds now.
3) The final factor explaining Abe’s decision to call an election may be that in Japan the government’s performance in opinion polls seems to mirror the performance of the local STOCK MARKET (wouldn’t Barack Obama like to see such a correlation in the US?). With the Nikkei breaking out to new highs, Abe may feel that now is the best time to try and cement his party’s dominant position in the Diet.
As he gets ready to face the voters, how should Abe attempt to portray himself? In our view, he could do worse than present himself as Japan Inc’s biggest salesman. Since the start of his second mandate, Abe has visited 49 countries in 21 months, and taken hundreds of different Japanese CEOs along with him for the ride. The message these CEOs have been spreading is simple: Japan is a very different place from 20 years ago. Companies are doing different things, and investment patterns have changed. Many companies have morphed into completely different animals, and are delivering handsome returns as a result. The relative year to date outperformances of Toyo Tire (+117%), Minebea (+95%), Mabuchi (+57%), Renesas (+43%), Fuji Film (+33%), NGK Insulators (+33%) and Nachi-Fujikoshi (+19%) have been enormous. Or take Panasonic as an example: the old television maker has transformed itself into a car parts firm, piggy-backing on the growth of Tesla’s model S.
Yet even as these changes have occurred, most foreign investors have stopped visiting Japan, and most sell-side firms have stopped funding genuine and original research. For the alert investor this is good news. As the number of Japanese firms at the heart of the disruptions reshaping our global economy – robotics, electric and self-driving cars, alternative energy, healthcare, care for the elderly – continues to expand, and as the number of investors looking at these same firms continues to shrink, those investors willing to sift the gravel of corporate Japan should be able to find real gems.
Which brings us to the real question confronting investors today: the ‘Kuroda put’ has placed Japanese equities back on investor’s maps. But is this just a short term phenomenon? After all, no nation has ever prospered by devaluing its currency. If Japan is set to attract, and retain, foreign investor flows, it will have to come up with a more compelling story than ‘we print money faster than anyone else’.
In our recent research, we have argued that this is exactly what is happening. In fact, we believe so much in the opportunity that we have launched a dedicated Japan corporate research service (GK Plus Alpha) whose principals (Alicia Walker and Neil Newman) are burning shoe leather to identify the disruptive companies that will trigger Japan’s next wave of growth.
3. Should we worry about capital misallocation in the US?
The US has now ‘enjoyed’ a free cost of money for some six years. The logic behind the zero-interest rate policy was simple enough: after the trauma of 2008, the animal spirits of entrepreneurs needed to be prodded back to life. Unfortunately, the last few years have reminded everyone that the average entrepreneur or investor typically borrows for one of two reasons:
- Capital spending: Business is expanding, so our entrepreneur borrows to open a new plant, or hire more people, etc.
- Financial engineering: The entrepreneur or investor borrows in order to purchase an existing cash flow, or stream of income. In this case, our borrower calculates the present value of a given income stream, and if this present value is higher than the cost of the debt required to own it, then the transaction makes sense.
Unfortunately, the second type of borrowing does not lead to an increase in the stock of capital. It simply leads to a change in the ownership of capital at higher and higher prices, with the ownership of an asset often moving away from entrepreneurs and towards financial middlemen or institutions. So instead of an increase in an economy’s capital stock (as we would get with increased borrowing for capital spending), with financial engineering all we see is a net increase in the total amount of debt and a greater concentration of asset ownership. And the higher the debt levels and ownership concentration, the greater the system’s fragility and its inability to weather shocks.
We are not arguing that financial engineering has reached its natural limits in the US. Who knows where those limits stand in a zero interest rate world? However, we would highlight that the recent new highs in US equities have not been accompanied by new lows in corporate spreads. Instead, the spread between 5-year BBB bonds and 5-year US treasuries has widened by more than 30 basis points since this summer.
Behind these wider spreads lies a simple reality: corporate bonds issued by energy sector companies have lately been taken to the woodshed. In fact, the spread between the bonds of energy companies, and those of other US corporates are back at highs not seen since the recession of 2001-2002, when the oil price was at US$30 a barrel.
The market’s behavior raises the question whether the energy industry has been the black hole of capital misallocation in the era of quantitative easing. As our friend Josh Ayers of Paradarch Advisors (Josh publishes a weekly entitled The Right Tale, which is a fount of interesting ideas. He can be reached at email@example.com) put it in a recent note: “After surviving the resource nadir of the late 1980s and 1990s, oil and gas firms started pumping up capex as the new millennium began. However, it wasn’t until the purported end of the global financial crisis in 2009 that capital expenditure in the oil patch went into hyperdrive, at which point capex from the S&P 500’s oil and gas subcomponents jumped from roughly 7% of total US fixed investment to over 10% today.”
“It’s no secret that a decade’s worth of higher global oil prices justified much of the early ramp-up in capex, but a more thoughtful look at the underlying data suggests we’re now deep in the malinvestment phase of the oil and gas business cycle. The second chart (above) displays both the total annual capex and the return on that capex (net income/capex) for the ten largest holdings in the Energy Select Sector SPDR (XLE). The most troublesome aspect of this chart is that, since 2010, returns have been declining as capex outlays are increasing. Furthermore, this divergence is occurring despite WTI crude prices averaging nearly $96 per barrel during that period,” Josh noted.
The energy sector may not be the only place where capital has been misallocated on a grand scale. The other industry with a fairly large target on its back is the financial sector. For a start, policymakers around the world have basically decided that, for all intents and purposes, whenever a ‘decision maker’ in the financial industry makes a decision, someone else should be looking over the decision maker’s shoulder to ensure that the decision is appropriate. Take HSBC’s latest results: HSBC added 1400 compliance staff in one quarter, and plans to add another 1000 over the next quarter. From this, we can draw one of two conclusions:
1) The financial firms that will win are the large firms, as they can afford the compliance costs.
2) The winners will be the firms that say: “Fine, let’s get rid of the decision maker. Then we won’t need to hire the compliance guy either”.
This brings us to a theme first explored by our friend Paul Jeffery, who back in September wrote: “In 1994 Bill Gates observed: ‘Banking is necessary, banks are not’. The primary function of a bank is to bring savers and users of capital together in order to facilitate an exchange. In return for their role as [trusted] intermediaries banks charge a generous net spread. To date, this hefty added cost has been accepted by the public due to the lack of a credible alternative, as well as the general oligopolistic structure of the banking industry. What Lending Club and other P2P lenders do is provide an online market-place that connects borrowers and lenders directly; think the eBay of loans and you have the right conceptual grasp. Moreover, the business model of online market-place lending breaks with a banking tradition, dating back to 14th century Florence, of operating on a “fractional reserve” basis. In the case of P2P intermediation, lending can be thought of as being “fully reserved” and entails no balance sheet risk on the part of the service facilitator. Instead, the intermediary receives a fee- based revenue stream rather than a spread-based income.”
There is another way we can look at it: finance today is an abnormal industry in two important ways:
1) The more the sector spends on information and communications technology, the bigger a proportion of the economic pie the industry captures. This is a complete anomaly. In all other industries (retail, energy, telecoms…), spending on ICT has delivered savings for the consumers. In finance, investment in ICT (think shaving seconds of trading times in order to front run customer orders legally) has not delivered savings for consumers, nor even bigger dividends for shareholders, but fatter bonuses and profits for bankers.
2) The second way finance is an abnormal industry (perhaps unsurprisingly given the first factor) lies in the banks’ inability to pass on anything of value to their customers, at least as far as customer’s perceptions are concerned. Indeed, in ‘brand surveys’ and ‘consumer satisfaction reports’, banks regularly bring up the rear. Who today loves their bank in a way that some people ‘love’ Walmart, Costco, IKEA, Amazon, Apple, Google, Uber, etc?
Most importantly, and as Paul highlights above, if the whole point of the internet is to:
a) measure more efficiently what each individual needs, and
b) eliminate unnecessary intermediaries,
then we should expect a lot of the financial industry’s safe and steady margins to come under heavy pressure. This has already started in the broking and IN THE MONEY management industries (where mediocre money managers and other closet indexers are being replaced by ETFs). But why shouldn’t we start to see banks’ high return consumer loan, SME loan and credit card loan businesses replaced, at a faster and faster pace, by peer-to-peer lending? Why should consumers continue to pay high fees for bank transfers, or credit cards when increasingly such services are offered at much lower costs by firms such as TransferWise, services like Alipay and Apple Pay, or simply by new currencies such as Bitcoin? On this point, we should note that in the 17 days that followed the launch of Apple Pay on the iPhone 6, almost 1% of Wholefoods’ transactions were processed using the new payment system. The likes of Apple, Google, Facebook and Amazon have grown into behemoths by upending the media, advertising retail and entertainment industries. Such a rapid take- up rate for Apple Pay is a powerful indicator which sector is likely to be next in line. How else can these tech giants keep growing and avoid the fate that befell Sony, Microsoft and Nokia? On their past record, the technology companies will find margins, and growth, in upending our countries’ financial infrastructure. As they do, a lot of capital (both human and monetary) deployed in the current infrastructure will find itself obsolete.
This possibility raises a number of questions – not least for Gavekal’s own investment process, which relies heavily on changes in the velocity of money and in the willingness and ability of commercial banks to multiply money, to judge whether it makes sense to increase portfolio risk. What happens to a world that moves ‘ex-bank’ and where most new loans are extended peer-to-peer? In such a world, the banking multiplier disappears along with fractional reserve banking (and consequently the need for regulators? Dare to dream…). As bankers stop lending their clients umbrellas when it is sunny, and taking them away when it rains, will our economic cycles become much tamer? As central banks everywhere print money aggressively, could the market be in the process of creating currencies no longer based on the borders of nation states, but instead on the cross-border networks of large corporations (Alipay, Apple Pay…), or even on voluntary communities (Bitcoin). Does this mean we are approaching the Austrian dream of a world with many, non government-supported, currencies?
4. Should we care about Europe?
In our September Quarterly Strategy Chartbook, we debated whether the eurozone was set for a revival (the point expounded by François) or a continued period stuck in the doldrums (Charles’s view), or whether we should even care (my point). At the crux of this divergence in views is the question whether euroland is broadly following the Japanese deflationary bust path. Pointing to this possibility are the facts that 11 out of 15 eurozone countries are now registering annual year-on-year declines in CPI, that policy responses have so far been late, unclear and haphazard (as they were in Japan), and that the solutions mooted (e.g. European Commission president Jean-Claude Juncker’s €315bn infrastructure spending plan) recall the solutions adopted in Japan (remember all those bridges to nowhere?). And that’s before going into the structural parallels: ageing populations; dysfunctional, undercapitalized and overcrowded banking systems; influential segments of the population eager to maintain the status quo etc…
With the same causes at work, should we expect the same consequences? Does the continued underperformance of eurozone stocks simply reflect that managing companies in a deflationary environment is a very challenging task? If euroland has really entered a Japanese-style deflationary bust likely to extend years into the future, the conclusion almost draws itself.
The main lesson investors have learned from the Japanese experience of 1990-2013 is that the only time to buy stocks in an economy undergoing a deflationary bust is:
a) when stocks are massively undervalued relative both to their peers and to their own history, and
b) when a significant policy change is on the way.
This was the situation in Japan in 1999 (the first round of QE under PM Keizo Obuchi), 2005 (PM Junichiro Koizumi’s bank recapitalization program) and of course in 2013-14 (Abenomics). Otherwise, in a deflationary environment with no or low growth, there is no real reason to pile into equities. One does much better in debt. So, if the Japan-Europe parallel runs true, it only makes sense to look at eurozone equities when they are both massively undervalued relative to their own histories and there are expectations of a big policy change. This was the case in the spring of 2012 when valuations were at extremes, and Mario Draghi replaced Jean-Claude Trichet as ECB president. In the absence of these two conditions, the marginal dollar looking for equity risk will head for sunnier climes.
With this in mind, there are two possible arguments for an exposure to eurozone equities:
1) The analogy of Japan is misleading as euroland will not experience a deflationary bust (or will soon emerge from deflation).
2) We are reaching the point when our two conditions – attractive valuations, combined with policy shock and awe – are about to be met. Thus we could be reaching the point when euroland equities start to deliver outsized returns.
Proponents of the first argument will want to overweight euroland equities now, as this scenario should lead to a rebound in both the euro and European equities (so anyone underweight in their portfolios would struggle). However, it has to be said that the odds against this first outcome appear to get longer with almost every data release!
Proponents of the second scenario, however, can afford to sit back and wait, because it is likely any outperformance in eurozone equities would be accompanied by euro currency weakness. Hence, as a percentage of a total benchmark, European equities would not surge, because the rise in equities would be offset by the falling euro.
Alternatively, investors who are skeptical about either of these two propositions can – like us – continue to use euroland as a source of, rather than as a destination for, capital. And they can afford safely to ignore events unfolding in euroland as they seek rewarding investment opportunities in the US or Asia. In short, over the coming years investors may adopt the same view towards the eurozone that they took towards Japan for the last decade: ‘Neither loved, nor hated… simply ignored’.
Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.
For example, if in 1981 an investor had decided to forego investing in commodities and simply to diversify his holdings across other asset classes, his decision would have been enough to earn himself a decade at the beach. If our investor had then returned to the office in 1990, and again made just one decision – to own nothing in Japan – he could once again have gone back to sipping margaritas for the next ten years. In 2000, the decision had to be not to own overvalued technology stocks. By 2006, our investor needed to start selling his holdings in financials around the world. And by 2008, the money-saving decision would have been to forego investing in euroland.
Of course hindsight is twenty-twenty, and any investor who managed to avoid all these potholes would have done extremely well. Nevertheless, the big question confronting investors today is how to avoid the potholes of tomorrow. To succeed, we believe that investors need to answer the following questions:
- Will Japan engineer a revival through its lead in exciting new technologies (robotics, hi-tech help for the elderly, electric and driverless cars etc…), or will Abenomics prove to be the last hurrah of a society unable to adjust to the 21st century? Our research is following these questions closely through our new GK Plus Alpha venture.
- Will China slowly sink under the weight of the past decade’s malinvestment and the accompanying rise in debt (the consensus view) or will it successfully establish itself as Asia’s new hegemon? Our Beijing based research team is very much on top of these questions, especially Tom Miller, who by next Christmas should have a book out charting the geopolitical impact of China’s rise.
- Will Indian prime minister Narendra Modi succeed in plucking the low-hanging fruit so visible in India, building new infrastructure, deregulating services, cutting protectionism, etc? If so, will India start to pull its weight in the global economy and financial markets?
- How will the world deal with a US economy that may no longer run current account deficits, and may no longer be keen to finance large armies? Does such a combination not almost guarantee the success of China’s strategy?
- If the US dollar is entering a long term structural bull market, who are the winners and losers? The knee-jerk reaction has been to say ‘emerging markets will be the losers’(simply because they were in the past. But the reality is that most emerging markets have large US dollar reserves and can withstand a strong US currency. Instead, will the big losers from the US dollar be the commodity producers?
- Have we reached ‘peak demand’ for oil? If so, does this mean that we have years ahead of us in which markets and investors will have to digest the past five years of capital misallocation into commodities?
- Talking of capital misallocation, does the continued trend of share buybacks render our financial system more fragile (through higher gearing) and so more likely to crack in the face of exogenous shocks? If it does, one key problem may be that although we may have made our banks safer through increased regulations (since banks are not allowed to take risks anymore), we may well have made our financial markets more volatile (since banks are no longer allowed to trade their balance sheets to benefit from spikes in volatility). This much appeared obvious from the behavior of US fixed income markets in the days following Bill Gross’s departure from PIMCO. In turn, if banks are not allowed to take risks at volatile times, then central banks will always be called upon to act, which guarantees more capital misallocation, share buybacks and further fragilization of the system (expect more debates along this theme between Charles, and Anatole).
- Will the financial sector be next to undergo disintermediation by the internet (after advertising and the media). If so, what will the macro- consequences be? (Hint: not good for the pound or London property.)
- Is euroland following the Japanese deflationary-bust roadmap?
The answers to these questions will drive performance for years to come. In the meantime, we continue to believe that a portfolio which avoids a) euroland, b) banks, and c) commodities, will do well – perhaps well enough to continue funding Mediterranean beach holidays – especially as these are likely to go on getting cheaper for anyone not earning euros!
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Chinese President Xi Jinping and his Russian counterpart Vladimir Putin promised ever closer cooperation Sunday as they met for the 10th time in less than two years.
The two men, who held talks in Beijing, have increasingly stressed their shared outlooks which mirror their countries’ converging trade, investment and geopolitical interests.
The two sides signed a series of agreements to step up their multi-billion-dollar natural resources collaboration.
“Together we have carefully taken care of the tree of Russian-Chinese relations,” Xi told Putin at the Diaoyutai state guesthouse in Beijing.
“Now fall (autumn) has set in, it’s harvest time, it’s time to gather fruit,” he said.
“No matter the changes on the global arena, we should stick to the chosen path to expand and strengthen our comprehensive mutually fruitful cooperation.”
Russia and China have been brought together by mutual geopolitical concerns, among them wariness of the United States.
The two countries often vote as a pair on the U.N. Security Council, where both hold a veto, sometimes in opposition to Western powers on issues such as Syria.
Putin said that Russian-Chinese cooperation was “very important for keeping the world within the framework of international law, to make it more stable, more predictable”.
“Me and you have done a lot for this and I am sure we will continue to work in this manner in the future,” he added.
Moscow faces harsh Western criticism and sanctions over its seizure of Crimea and the conflict in eastern Ukraine, which could see Europe reduce its consumption of Russian gas.
Beijing also has tense relationships over territorial disputes with neighbors such as Japan, Vietnam and the Philippines.
At the same time, it is constantly on the lookout for resources to power its economic growth.
After a decade of negotiations, the countries signed a huge 30-year gas deal said to be worth $400 billion during a visit to China by Putin in May.
On Sunday they stepped up the engagement, with Russia’s Rosneft and China National Petroleum Corporation (CNPC), both of them petroleum giants, signing an agreement for the Chinese firm to take a 10 percent stake in a huge Siberian energy project.
CNPC also signed deals on gas supplies and transport routes, with financial agreements also inked.
Putin is visiting China for the Asia-Pacific Economic Cooperation (APEC) summit, which starts on Monday and will also be attended by US President Barack Obama and Japan’s Prime Minister Shinzo Abe, as well as other leaders.
The APEC region includes 40 percent of the world’s population, nearly half its trade and more than half its GDP.
Hong Kong students on Monday began a week-long boycott of classes, gathering in their thousands for what democracy activists say will be a wider campaign of civil disobedience against China’s refusal to grant the city unfettered democracy.
Student activists crowded onto a campus on the northern outskirts of the city, many sheltering from the hot summer sun under umbrellas and waving their faculty flags, as their leaders vowed to ratchet up their campaign if their demands were not met.
Democracy campaigners are locked in a showdown with authorities on the mainland after the former British colony’s hopes for full universal suffrage were dashed by Beijing’s plans to vet nominees who want to stand as its next leader.
A coalition of pro-democracy groups in the semi-autonomous Chinese city, led by Occupy Central, have labelled the restrictions a “fake democracy”. They have vowed a series of actions including a blockade of the Central financial district.
The city’s vocal student community on Monday became the first wing of that coalition to move from protests to direct action — starting a week of class boycotts designed to capture the public’s imagination and bolster the pro-democracy fight.
“I don’t think the Chinese government is trying to protect our rights so now we are coming out to fight for our basic needs,” 20-year-old architecture student Wu Tsz-wing told AFP as she gathered with what organisers said were 13,000 others on the leafy campus of the Chinese University of Hong Kong.
There was no estimate given by police, who usually quote much lower numbers during similar protests.
Arika Ho, a second-year Hong Kong University journalism student, added: “I want this place (Hong Kong) to be a better place, so I want to stand up and join with others collectively to force some changes.”
Alex Chow, chairman of the influential Hong Kong Federation of Students, said student groups would intensify their protests if their call for Hong Kongers to nominate their own candidate to lead the city is ignored.
“We demand the government to respond to our call to endorse civil nominations,” he told the crowd.
“If we hear nothing from them, the students, the people will definitely upgrade the movement to another level,” Chow shouted.
The Chinese University of Hong Kong has become a regular gathering point for students agitating for greater democratic freedoms in the city.
The campus boasts a replica of the “Goddess of Democracy” statue which students gathered around during the 1989 Tiananmen protests in Beijing that were brutally crushed by the state.
The Hong Kong strike could breathe new life into the democracy campaign, which recently lost some steam after its senior leaders conceded that Beijing is highly unlikely to change its mind whatever they do.
Leaders from Occupy on Monday said they were encouraged by the student turnout.
“The future belongs to them (the students),” co-founder Benny Tai told AFP.
“I think that if they can stand up and demonstrate determination in wanting democracy in Hong Kong, I think that will be a clear message to Beijing and the government.”
The boycott comes a week after more than 1,500 activists marched through Hong Kong’s streets carrying huge sheets of black cloth and banners demanding genuine universal suffrage.
That marked the first sizable protest since China’s National People’s Congress (NPC) ruled in late August that candidates for the 2017 chief executive polls will be vetted by a pro-Beijing committee — and just two or three approved nominees will be allowed to stand.
The students can point to their success in 2012, when they were at the forefront of protests against plans by the Hong Kong government to institute a “national education” curriculum seen as pro-China. The government eventually backed down.
But in Beijing, the rhetoric in official media has remained unrelenting against any concessions to the Hong Kong democracy movement, which some in the Communist regime see as an insidious threat to their rule of the country as a whole.
Tensions in the southern Chinese city, which was handed back to Britain under an agreement that granted greater rights than those seen on the mainland, are at their highest in years over rising inequality and Beijing’s perceived political interference.
More than one in five Hong Kongers are considering emigrating because of the political climate, according to a poll by the Chinese University of Hong Kong released Sunday.
The poll also revealed widespread pessimism over the city’s political future. On a scale of zero to 10, with zero being “extremely pessimistic”, the average response was 4.22.