The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

How China’s Banks Risk Wealth Management Cash
By staff reporters Wen Xiu, Yang Na, Chen Huiying, Zhao Jingting and Ma Yuan
07.21.2011 16:18

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Banks are rolling over wealth management investments to finance real estate and local government projects, raising red flags

Call it the Great Wealth Rollover of China.

The nation’s banks have been introducing new wealth management investment products at a blurring pace over the past year, dazzling upper-class clients with fat catalogues of high-yield investment opportunities.

Yet Caixin has learned from bank and regulatory sources that much of the wealthy investor cash pouring into short-term, high-risk products is being rolled over by banks to provide fresh financing for long-term investments, including unfinished property developments, local government financing platforms, railway projects and private equity.

The rollover game is providing badly needed funds for infrastructure projects for which credit has dried up over the past year with every notch of monetary tightening by the central government. It’s helped offset the government’s rising bank deposit reserve requirement, for example, which has crimped bank lending.

At the same time, some industry experts warn, the banks may be fobbing off long-term investment risks to their wealth management clients.

By offering the well-to-do a dizzying variety of investment products along with promises of near-double-digit returns, some fear banks are leading wealth management clients into the same trap that caught U.S. investors before they were fleeced during the 2007 subprime mortgage crisis.

About 9,000 types of wealth management products were available to Chinese investors during the first half of 2011, double the number offered in 2010. Capital turnover for these products topped 8 trillion yuan between January and June.

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Some interesting reads for your weekend reading pleasure:

• The Big Lie At The Heart Of Rupert Murdoch’s Media Empire (Alter Net) see also Fury at Murdoch reflects pent-up anger of intimidated politicians (Washington Post)
• Is “Finance” a Cult? (Umair Haque)
• What the Keynesians learned from the crisis (Washington Post) see also I’m starting to think that the Left might actually be right (Telegraph)
• A handbag away from our debt ceiling (Tim Harford)
• Weather business sizzles in the summer heat (Globe and Mail)
• Google + Start Up Guide (Google)
• How Steve Jobs Does It: The Auteur vs. the Committee (NYT)
• Webs and whirligigs: Marshall McLuhan in his time and ours (Nieman Journalism Lab)
• If Your Website’s Full Of Assholes, It’s Your Fault (Anil Dash)
• The Problem With Memoirs (NYT)

What are you reading?

202-224-3121
July 23, 2011
David Kotok

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202-224-3121 is the telephone number for the US Capitol. No typo this time: I just tested the number and left a message for a Member of Congress.

The message is simple. Dear Congressman/woman: if the United States defaults, the personal and institutional responsibility for the fallout is squarely on you. If the House and the Senate reconcile and pass a debt ceiling bill and send it to the President, then, and only then, is there a transfer of responsibility to the White House.

“Directly Linked Aaa credits have been placed on review for possible downgrade, affecting more than 7000 ratings,” said Moody’s. “Indirectly linked Aaa credits” will be assigned “into one of two categories, according to the degree of their vulnerability to the credit of the U.S. government.”

America’s full faith and credit is on negative review by Moody’s, Fitch and S&P. Independent rater Egan-Jones has already downgraded the US credit.

At Cumberland we have not downgraded the US. It has the absolute capacity to pay every obligation it owes. It has a $15-trillion economy, an operating legal structure, a liquid capital market, functioning courts which enforce claims, and it has its own central bank. The US dollar is the reserve currency of the world.

At Cumberland, we do not issue specific political ratings. If we did, the US Congress would get an F. It is an absolute failure. There is no limit to the opprobrium, scorn, ridicule, criticism, and disdain that can be heaped on them as a collective. But a collective is a composite of individuals. Many of these individuals are intransigent, uncompromising, blundering, idiotic fools. Listen to their statements and watch their actions. And we, my fellow citizens, elect them. We then go on about our regular business and are passive. What does that make us?

Their telephone number is 202-224-3121. Give the switchboard the name of the Congressman or Senator. Leave an unambiguous message.

Some of the directly linked bonds on the credit agency watch list are: pre-refunded Munis secured by escrows of treasury securities; Federal Home Loan Bank credits; Fannie Mae, Freddie Mac, and Ginnie Mae credits; many state housing finance-agency bonds; HUD-sourced credits; and debt linked to US government leases. There are over 7000 credits on the direct-linked list. They measure in the trillions of dollars. There are many more on the indirect-linked list.

In addition, the US government makes transfer payments to Social Security recipients, veterans, the disabled, and many others. It funds the deficiency balances of the unemployment trust funds among the 50 states. It is the back-stop guarantor of the FDIC, which is the insurance agency for bank deposits in the United States.

I will stop the list here. If you are still with me, dear reader, you know where this is going: 202-224-3121.

Cumberland’s investment view is based upon a no-default scenario. We believe the best assurance that there will be no default is in the hands of the citizens of US. Watch their anger if they do not get paid by their government. The Gang of 535 consists of 435 House Members and 100 Senators. They will feel this wrath. They know it. That is why we believe there will be no default.

But we are not complacent. There is uncertainty. A fear premium is in the marketplace. In our view, this provides the investor with opportunity.

The no-default scenario is playing out in Europe. It will play out here, too. The most impacted sector is the financials. My friend Dick Bove at Rochdale Research has made the case for undervalued banks. He is correct. There are many banks trading their shares at half of their book value, and that is after the book value has been hit by substantial loan-loss reserves.

This is not just about banks. The entire financial sector is cheap. It has been beaten up by regulatory issues, specifically by Dodd-Frank and indirectly by thousands of bureaucrats at the federal and state level. And it depends on the US government to maintain its Aaa credit rating and avoid default.

At Cumberland, we have taken the financial sector to an overweight position. We do this right in the heat of the battle. Financials are about 15% of the weight in the S&P 500 index. Our collective weight is 21%. Our specific ETF choices are XLF, KRE, and ICF. We hold them in our US exchange-traded fund portfolios. We also have exposure in our global portfolios. More details can be found in this week’s Barron’s in the column on ETFs written by Murray Coleman.

No American default is our assumption. If we are wrong, if the US defaults, if the political system fails, then the markets will experience a horrible shock. The unthinkable will have occurred. We do not expect it. We believe Winston Churchill characterized the US well when he said, “You can always count on Americans to do the right thing after they’ve tried everything else.”

We are off to the GIC conference in Jackson Hole next week. Last count, there are 30-40 open seats left for those who may want to join the meeting and are wondering if there is space. Registration and conference agenda may be found at www.interdependence.org. Talk about timing for a meeting to discuss Fed policy, the economic outlook, and sovereign debt. Whoodahthunkit when we planned this date a year ago!

Thanks for your patience, dear readers. 202-224-3121. Churchill also said, “Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.” 202-224-3121.

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David R. Kotok, Chairman and Chief Investment Officer

I am not exactly a Hybrid kinda of guy — horsepower and handling are more my thing. And, hybrids cost extra — so much, in fact, that Hybrids take anywhere from 7-12 years to recoup the additional purchase costs and pay for themselves.

But, if I was given an option of getting the hybrid version of any car I was considering at the same exact price as the conventional gasoline version, of course I would take it.

So perhaps some behavioral economist can explain this to me:

NYT article to me:

“It’s a given that hybrids cost more than the equivalent gasoline-only models — a gap justified, automakers say, by the added cost and complexity of hybrid-drive systems. But because hybrid mechanicals are often bundled with upscale features, the difference can amount to many thousands of dollars.

For that reason, the Lincoln MKZ Hybrid stands out, offering a value proposition that is unique in the auto industry: a hybrid with the same price as its conventional gasoline counterpart.

By contrast, another product from the same company, the Ford Fusion Hybrid, carries a premium of $8,750 over a base Fusion; a Toyota Camry Hybrid is nearly $7,000 more than a base Camry . . .

Lincoln’s strategy seems to be working. About 20 percent of 2011 MKZ sales have been hybrids, compared with a forecast of about 15 percent. (In the Los Angeles region, the percentage is 44 percent; in the San Francisco area, it is an astonishing 66 percent.)”

So my question: Why isn’t this much closer to 100%? Why wouldn’t someone (even a Horsepower freak like me) take the hybrid at no additional charge?

How can basic economics — you know, that Humans are rational, self motivated, economic-decision makers — explain this behavior?

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Source:
Upwardly Mobile Hybrids: Splurging While Saving Gas
JERRY GARRETT
NYT, July 22, 2011  
http://www.nytimes.com/2011/07/24/automobiles/upwardly-mobile-hybrids-splurging-while-saving-gas.html

Sad (but seemingly inevitable) news from London.

Daily Mail:

Amy Winehouse has been found dead at her home in London, it has been reported.
The Back To Black singer was apparently found at 4pm and her death is believed to be unexplained.

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US Television Debut on Letterman

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You Know I’m No Good

Back from Black – The Amy Winehouse Show tribute – You Know I’m No Good from Mike Walker on Vimeo.

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Back to Black

Back from Black – The Amy Winehouse Show tribute – Back to Black from Mike Walker on Vimeo.

Our man in Switzerland, Felix Zulauf graces the Up & Down Wall Street column by Alan Abelson, Zulauf, a long standing EU/Euro skeptic, is not impressed with the $157 billion Greek bailout:

“The bailout blueprint avoids for the time being default and escalating contagion, but in Felix’s view it does zilch to ameliorate the causes of Greece’s (or anybody else’s) fiscal woes. “The politicians,” he explains, with only the vaguest of smirks, “obviously believe that the world will get back to good growth and great tax revenues” and the problems will vanish. Which, not surprisingly, he sees as pure, unadulterated hogwash . . .

As the primary cause of the euro crisis, Felix fingers the huge competitive differences between Germany, which has frozen labor costs over the past 10 years and the weak sisters of the euro union, not a few of whom merrily partied and went deeply in debt often via real-estate booms even gaudier that the one that ultimately laid us low. The banks of the peripheral members are suffering from what he calls “a slow-motion bank run.” To make matters worse, the governments of the peripherals have imposed fiscal austerity, which he expects, will plunge their economies back into recession by the time the fourth quarter rolls around . . .

Thanks to the decision to once more bail out Greece, equity markets, he concludes, may rally and U.S. shares might even reach new highs in the next two to four weeks. But, avers Felix, stocks are moving in a different direction than the sluggish underlining economies. He compares the situation to a fully loaded plane flying too low and at slowing speed. “Under such circumstances,” he warns, “all sorts of unpleasant surprises usually arrive.” (emphasis added)

We consider ourselves warned . . .

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Previously:
The Big Picture Interview: Felix Zulauf (August 2010)
(Transcript)

Source:
Back From the Brink
ALAN ABELSON
Barrons, JULY 23, 2011
http://online.barrons.com/article/SB50001424053111903337604576455932865193582.html

Kicking the Can Down the Road One More Time
John Mauldin
July 21, 2011

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Kicking the Can Yet Again
It’s Not Just Greece
Who is Going to Buy that Debt?
You Have to Admire the Commitment
The Problem with US Employment
Washington DC, Vancouver, NYC, Maine, and now Europe

This week we start with the latest version of the solution to the European Crisis, the details of which are now coming out. Then we look at the global economy, and some signs that seem to point to a softening. And then there’s some data on US employment from a friend who has some thoughts about what we really need to do to get unemployment to come down. There is a lot to cover.

But first, we have posted the latest of our Conversations with John Mauldin on the website. It is with Dylan Grice of Societe Generale in London, and he is just brilliant. Subscribers will love it. Basically, Conversations with John Mauldin is my subscription service where you can “listen in” on my conversations with my friends from around the world talking about the topics of the day. Subscribers give it rave reviews, and of course we do transcriptions. You can go to http://www.johnmauldin.com/conversations/ and type in CONV as the code to get a $50 discount off the $199 price. And, of course, you’ll get the past conversations as well, with all sorts of well-known analysts. To learn more just click on the link. And now, let’s turn to Europe.

Kicking the Can Yet Again

My friends at GaveKal point out that this is “… the sixth time in 18 months European leaders have announced a definitive solution to the Euro crisis. Should this version of the final bailout be taken any more seriously than the first and second solutions to the Greek crisis in May and September 2010 or the Irish bailout of December 2010 or the Portuguese rescue package of March 2011 or the breakthrough vote in the Greek parliament of last month? The supposedly good news for markets was that the -21% haircuts to be imposed on Greek creditors (as estimated by banker groups) were less than half those suggested a few days ago.”

A 21% haircut is a bad joke. If you assume that Greece can afford to spend 10% of their revenues just to pay the interest, which is what they will need to be able to do to get out of their crisis, then the haircuts look more like 75-80%. Sean Egan, the most credible credit analyst in the country, estimated this week that the eventual haircuts on the Greek debt will be 90%.

You can read the release from the EU leaders in its entirety, if you like, at http://www.foxbusiness.com/markets/2011/07/21/read-eu-leaders-full-statement-on-greek-bailout/. I really have no idea what you should drink as you read it.

Here is what it really says: We are going to keep throwing good money after bad and work as hard as we can to transfer the debt that is on the banks to the ECB and European taxpayers as long as the voters will let us. This first tranche will be another €109 billion. That will last a few years, and Greece will only have to pay about 3.5% on that debt and the rollover debt, and people who expected to be repaid in that period will see payment extended to either 15 or 30 years.

You can call this what you like, and they call it “selective default,” but it is a default. There will be government guarantees on the debt, so the ECB can take it from the banks.

Let’s see what the “voluntary” debt rollovers will look like and what the likely debt destruction will be. This is from Global Macro Monitor.

First, notice that the plan claims haircuts will only be 21%. But that assumes you can sell the new bonds at a 9% interest rate. If the interests rate demanded by the market are 15%, which is closer to reality, the haircuts are closer to 67%, after what appears to be an initial 20% cut. Will any institution not immediately try and get those bonds into the hands of the ECB? This is just ugly.

I have to quote what may be the most laughable part of the whole document:

“4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the Commission’s decision to create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training. We will mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek economy. Member States and the Commission will immediately mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms. The Commission will report on progress in this respect in October.”

Ok, the Greek economy is in a depression, so let’s fire up a jobs program. Run by socialists and bureaucrats. The entire Eurozone is slipping into a slow-growth recession, and these guys are just focusing on Greece.

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The Arab Spring is widely known as a Twitter rebellion, but underground hip-hop artists also played a very important role, says Robin Wright, author of “Rock the Casbah: Rage and Rebellion Across the Islamic World.”

WSJ:

In November 2010, a young Tunisian rapper who called himself El General posted a song on his Facebook page and YouTube. He had no alternative.

The government of President Zine al-Abidine Ben Ali had virtually banned hip-hop. Its musicians were not on government-approved playlists for state-controlled television or radio. They were rarely able to get permits to perform in public. And most were barred from recording CDs.

El General—whose real name is Hamada Ben Amor—had no resources of his own. At age 21, he faced the problems of many young Tunisians. He was without reliable work and still living at home with his parents. For Tunisia’s rappers, the only regular gigs were on the Internet. So he recorded the song underground.

“I had two friends,” he later explained. “One filmed my songs on a small video camera, and the other edited the videos and put them up on YouTube.” It raged against the problems of poverty, unemployment, hunger and injustice—and boldly blamed them all on Mr. Ben Ali.

The four-minute video was haunting and raw. It showed the young rapper sauntering through a dark, sewage-strewn alley on his way to a makeshift studio with graffiti spray-painted on the wall. He beat out the song in front of an old-fashioned mike, with no one else in sight, and then ambled back down the alley into the night.

His face was never in the light, his identity remained unclear. Going public was too dangerous.

El General’s song was an instant sensation. Its outrage resonated, especially among the young. It broke through the climate of fear in a country where no politician had dared to criticize a president in power for almost a quarter-century. His incendiary rap registered hundreds of thousands of views on YouTube and across other social networks. The amateur video was even picked up by Al Jazeera, the 24-hour Arabic news channel.

Amazing stuff!

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Robin Wright talks with Jerry Seib about the The Hip-Hop Rebellion phenomenon

7/22/2011 9:13:24 PM

Economics writer Tim Harford studies complex systems — and finds a surprising link among the successful ones: they were built through trial and error. In this sparkling talk from TEDGlobal 2011, he asks us to embrace our randomness and start making better mistakes.

Hat tip Steve T

Succinct summation of week’s events:

Positives:

1) EU steps up with more help for Greece, Portugal and Ireland as EFSF becomes super TARP and Greek bond holders finally take a hit, but will it be enough?

2) July Philly mfr’g bounces back into positive land but still weak at 3.2 (was 43 in March)

3) MBA said refi’s bounce 23.1% off 10 week low, finally responding to low rates

4) Single and multi family housing starts bounce, multi we need more of, single we don’t right now

5) NAHB home builder index bounces 2 pts to 15 but off very depressed level

6) Corporate earnings so far, so good but guidance mixed

Negatives:

1) Preliminary HSBC mfr’g index in China falls below 50 for 1st time in a yr

2) Euro zone mfr’g and services composite index falls to lowest since Aug

3) German IFO business confidence drops to lowest since Oct

4) French business confidence down to 7 month low

5) US initial jobless claims rise more than expected, now above 400k for 15th straight week

6) Existing home sales fall to lowest since Nov and months supply rose to 9.5, most since Nov

7) Still no US debt/deficit deal

8) After falling from $3.98 to $3.56 per gallon of gasoline May thru early July, its back to $3.70.