Using Veritas to Construct the "Per…

29-04-2017 Hits:85784 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80012 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:79872 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84351 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80891 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:83138 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54149 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82274 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82124 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81993 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88018 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:85893 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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China: An Insight into its Past Growth and the Future (also of interest is the HSBC opinion and 2H08 update)

China’s massive growth in the last decade has taken the world by surprise. Currently the fourth largest economy, the country continues to be the second largest manufacturer (in terms of global output). The evolution of China as the “factory of the world” has helped in providing job opportunities to its vast population and record sustained economic growth. The country has led the growth among the emerging markets and is a torch bearer for the evolving upcoming economies of the world.

China holds the highest foreign exchange reserves of US$1.6 trillion as on March 2008. As per World Bank data, the country has grown at an average of 10% each year following the economic reforms of 1978, while other developing nations have grown at an average of 4%. No other country has recorded such sustained economic growth in the last three decades. China’s GDP growth has galloped at a breathless pace in the late 1990s, driven by increasing exports and investments in the country’s infrastructure.  

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Source : http://www.stats.gov.cn

 

 

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Source : www.tradingeconomics.com

 

Economic Growth Drivers

·        Emergence as manufacturing hub of the world

The Chinese economy has grown at an average rate of 9% in the last two decades. Industrial development has been the main driver of the rise in GDP with its contribution rising from 42% in 1990 to around 49% in 2006. The phenomenal industrial growth has been complemented by rising labor productivity. The Chinese government has introduced various liberal policies, such as subsidizing many industrial sectors, e.g. steel, keeping the interest rates low for big industrial corporates, subsidizing electricity and power, and keeping Yuan undervalued.

China Gasoline Price Rise Shifts Losses to Family Fishermen From Refiners: Aug. 18 (Bloomberg) -- Fisherman Cao Jianzhou may abandon the job his family has done for more than half a century because rising fuel costs mean he loses money every time he sets out to sea from his home northeast of Shanghai.

``About 70 percent of the fishermen in our village lost money in the first half of this year,'' said Cao, 44, who catches crab and shrimp with his eight-man crew off Chongming Island. ``Some have quit and survive on the fee from selling their boats for scrap.''

Cao is one of 750 million Chinese fishermen, farmers and their families who are being squeezed after the government in June joined India, Malaysia and Indonesia in raising state- controlled fuel prices to cut losses for refiners. The 17 percent increase in gasoline prices and 18 percent jump in diesel fall disproportionately on rural China, where household incomes average 315 yuan ($46) a month.

Favorable policies towards small and medium scale enterprises have enhanced the number of small firms in China. As of 2006, the number of SMEs stood at 269,031, whereas large and medium firms totaled 2685 and 30245, respectively. Low real estate prices for setting up factories and convenient logistics along the coastal regions have helped the country become the leader in manufacturing. The National Development and Reform Council of the government have subsidized natural gas and electricity prices, which has bolstered the growth and profit margins of many industries. For instance, Chinese steel producers are charged very low prices for electricity, natural gas, and utilities. With increasing raw material costs, most firms have stepped up their steel prices and passed the same to consumers. For instance, Baosteel increased steel prices by 20% on account of high iron ore costs.

 

 

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Source : National Bureau of Statistics, China

 

·        Low cost advantage in manufacturing

Low labor cost boosting the manufacturing sector has helped the Chinese economy record strong economic growth in the last few decades. In 2006, majority of the 109 million manufacturing workers were peasants from the countryside, available at low cost. The minimal wages paid to these workers play a major role in keeping the labor cost down; average wage is around 3% of that earned by an equivalent US worker. Chinese workers are deprived of social benefits, such as pension and medical insurance. Resentment against the coercive regulations of most Chinese firms is slowly building up in most parts of the country. Due to increasing turnover, most firms have resorted to bonded labor. Workers are asked to surrender official papers and pay a security deposit before they are granted jobs. Most firms are also believed to evade tax payments. Catering to the rising inflation, the Chinese government has increased minimum wages in many provinces, including Guangdong (as much as 18% from April 2008), Shanghai, and Beijing. These hikes are likely to fuel inflation as well as increase the cost of Chinese exports. If the high inflation persists, workers would demand higher wages, further pressuring the profitability of the firms.

·        Heavy investments in infrastructure to drive growth

In order to bolster its economic growth, China has made huge investments in infrastructure, which rose from 35% of the GDP in 2000 to 45% in 2006. Demand for cement in the country is expected to grow at an annual rate of 5.1% until 2010 to 1.3 billion metric tons. China would thereby become the largest consumer of cement, accounting for half the global consumption. Infrastructure investments have also been led by the high savings rate, which surged from 37% of the GDP in 2000 to 51% in 2006. The government and the corporate sector are the main savings drivers. Rising inflationary pressures in China would result in a decline in household savings. The country’s investments in factories and real estate grew 25.6% through May 2008. Investments in fixed assets increased to US$585 billion in the first five months of 2008 corresponding to 9,667 new investment projects, which would play a major role in transforming China’s growth story.

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Source : National Bureau of Statistics, China

·        Increase in worker productivity

China’s extraordinary growth is also attributed to its high labor efficiency. During 1979­­­–94, productivity (measured as a ratio of output to consumed resources) increased at an annual rate of 3.9% compared to an average US growth of 0.4%. Market aiding reforms, such as incentives to small and medium scale industries, have acted as the major triggers for the Chinese productivity boom. Through adequate benefits for rural enterprises, the government was able to obtain cheap labor by moving rural Chinese workers from the farms to factories.

Issues facing the Chinese Economy

·        Ability to finance capital growth in the future

The current Chinese growth requires increasing investment and savings rate for sustenance. With rising inflation, people may not continue to have the incentive to save. They would feel better off spending the money rather than investing the same at low or negative real interest rates. This factor could prove to be a drag on the economy. Moreover, the current boom is dependent on huge requirements of energy and other commodities; more than 30% of the world’s steel, tin, coal, and cement is consumed by the country. As per the Institute for the Analysis of Global Security oil consumption by China and India is expected to grow 7.5% and 5.5%, respectively. With rising crude and commodity prices (touching US$140 per barrel in June 2008, tapering off sharply but still up over 100% Y-O-Y), and depleting oil reserves, the country would face a challenge in sustaining its current growth momentum. The Chinese Central Bank has decided to tighten its monetary policy and control credit expansion as the economy is overheating. This decision may result in the reduction of expenditure on fixed assets, which would lead to a slowdown in China’s strong growth cycle, going forward.

·        Dependence on exports: Is it sustainable?

China has a huge current account surplus (over 10% of GDP), mainly on account of exports outstripping imports.

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Source : www.tradingeconomics.com

 

The US has always been one of the major export destinations of China. With the current US slowdown, exports cannot be expected to grow at same pace as in the past. Production in China is fast outstripping domestic demand. Manipulating export growth by currency devaluation can trigger tensions with other trading partners as this will cause their economies to be flooded by Chinese goods. Recently China was asked by the leading nations to revalue Yuan as the country had been trying to peg its currency low, hurting the prominent economies of the world. Increasing Chinese imports have been cited as one of the major reasons for the huge US trade deficit.

 

  image006.gif

Source : National Bureau of Statistics, China

 

·        Restrictions from trading partners

The rising protectionist attitude from the US and Europe are putting many barriers to Chinese exports. The G8 leaders have criticized the country for creating trade imbalances in July 2008, which could impede the growth of Chinese exports. Restrictions have been imposed on many Chinese products including textiles, steel, shoes, electronics, and automotive parts. There has been a growing resentment towards Chinese investments in North America and Europe.

·        Impact of a US Slowdown

Many Chinese manufacturing firms are facing revenue pressures due to recessionary conditions in the US. The diversion of exports to Europe and Asian markets is the only remedy to this situation. A broader export market would help in reducing the dependence on the US. Even though the Yuan has been appreciating lately against the US Dollar, it has remained relatively stable against the Euro. As per Citigroup, a one percent drop in the US growth rate will effectively slow down China’s growth by 1.3 percent. Analysts have lowered the latter’s growth in 2008 to 9.5% from the previous year’s 11.4%. Despite trying to reduce its reliance on the US, It is still China’s number two trading partner after the European Union; exports to the US increased 14% in 2007 to US$232.7 billion. China is perceived to have excess production capacity in textiles and auto industries which is likely to be exposed by the export slowdown. Chinese exports to the US have already been hit by the rising Yuan which has appreciated as much as 14% since 2005 against a falling US dollar. Many exporting factories in South East China have been closed rendering thousands jobless.

As US demand slows down, the growing middle class population is anticipated to drive the domestic demand. From 65.5 million in January 2005, China’s middle class has grown to 80 million in January 2007 and is projected to reach 700 million by 2020. However, the sluggish US economy would result in a decline in Chinese exports and impact the manufacturing and industrial sector in the country.

·        Impact of the US financial turmoil on China’s exports

China’s export-driven industries would face a drop in demand on account of the current mortgage crisis in the US. The severe credit crunch has halted the flow of export orders. US consumer confidence plummeted to 56.4 in May 2008 down from an average of 85.5 in the previous year. Consumers are cutting down on their consumption which would consequently reduce the demand and hence, US imports from China. Chinese exports in June 2008 saw a growth of 17.6%, slowing down considerably from 28.1% in the previous year. Though the country’s exports and imports have been rising at an annual rate of 20 percent since 2000, they are expected to slow down to a single digit figure in 2008. This decline is evident in the marked economic slowdown of three Chinese provinces Jiangsu, Zhejiang, and Guangdong, in January 2008. Yuan’s appreciation of 6.7 % in FY 2008 against the US Dollar has further reduced the competiveness of Chinese exports.

·        Impact of subprime crisis on Chinese banks

The US subprime crisis has begun affecting Chinese banks. In August 2007, Bank of China revealed its huge exposure to the US mortgage market, the largest till date for any Asian bank, with US$9.7 billion holdings in securitized US mortgage assets, approximately equivalent to its 2006 operating profit. Industrial and Commercial Bank of China also saw a huge drop in its share price on account of its US$1.23 billion holdings. The Chinese government’s efforts to improve the financial and banking system in the country have thereby been thwarted.

 

 

·        Rising Inflationary pressures

 

  image007.gif

Source : www.tradingeconomics.com

 

Inflation has been surging in China in the recent times, rising to a 12-year high in February 2008. There was a rise of 8.7% in the consumer price index compared to the 2007. Deutsche Bank uplifted inflation figures for 2008 from 6.4 percent to 7.2 percent for China. There are possibilities of an inflation spiral resulting from panic buying and hoarding. The price increases have started affecting Chinese exporters who are already battered by the Yuan which has been rising steadily for the last two and a half years. Inflation has been mostly exhibited in rising food and fuel prices. The booming stock market and high central bank interest rates have all contributed to the Chinese economy. The amount of goods produced has remained almost the same, thereby triggering demand-pull inflation. The government’s efforts of combating inflation by raising food production took a beating when China experienced the worst snowstorms in January and early February 2008, destroying tons of crops and field animals. Monetary measures from the government, including raising interest rates and appreciating Yuan, can severely hamper the economy growth rate. Despite sufficient funds to invest in the home country, fears of overheating due to inflationary pressures pose a major hurdle.

 

The Chinese government’s measures to combat inflation through agricultural incentives may not yield fruit due to its reluctance to squeeze years of continued growth through monetary tightening. The fundamental problem in Chinese inflation continues to be constraints in food supply. The increase in CPI throughout 2007 can be explained by the 20% rise in food prices, especially pork, whereas nonfood component prices have almost remained stable during this period. China’s inflation indicates a sudden fall in agricultural production, thereby not being able to meet the consumption needs of a booming economy. Even though crude prices are on a rise, the government has not completely passed the same to consumers. As prices of food items soar, people would divert their spending away from nonfood items, which should bring back inflation to normal levels. However, even nonfood inflation in China is on the rise (1.6% in February 2008 compared to 1.5% in the previous month), which indicates that inflation may also have pressures from the monetary side. Even though government policies can cool off food prices in the near future, inflationary affects may still show up in the goods and services sector.

·        New lows for manufacturing activity in China

The China Federation of Logistics and Purchasing (CFLP), which functions under the State Economics and Trade Commission, and China Logistics Information Centre (CLIC) maintain the Purchasing Manager’s Index (PMI) based on data from the National Bureau of Statistics. This index provides an overview of Chinese manufacturing activities. The PMI dropped to 53.3% in May 2008 from 59.2% in the previous month. Product outputs and new input purchases showed a marked decline. The index also indicates rising cost pressures on manufacturers. Industries showing major drags include wood processing and furniture, transport equipment, tobacco, and non-ferrous metal smelting. Current lows in the PMI index is attributed to the slowdown in the US economy which has impacted Chinese exports.

 

image008.gif

Source : http://www.cflp.org.cn/

·        Slowdown in Chinese industries

Major Chinese export industries are facing heavy losses on account of the depreciating US dollar. The textile industry growth declined to 5.7% in Jan–Feb 2008 compared to 19% during the corresponding period last year. This drop may trigger the government to offer tax incentives to the industry already battered by weakening demand and Yuan appreciation. The footwear industry is also combating the slowdown with major job cuts. As per officials in Asian Footwear Association, the industry laid down around 200,000 workers in the first quarter of 2008. Rising inflation is also eating into the margins of various firms. Baosteel, a Chinese steel maker, has increased steel prices by 20% on account of rising iron ore prices. Chinese steel production is expected to cool off in 2008 on account of the government’s plans to reduce domestic demands. The government’s focus has currently shifted towards energy saving and environment-friendly industry practices. The Chinese toy industry is going through a tough phase with rising labor costs and power outages. The recent ban on lead-tainted Chinese toys by the US has dealt another blow to the industry. Unfavorable domestic conditions are also adding to the problems. As many as 20 of the country’s largest aluminum firms have agreed to cut output by 10 percent on account of a countrywide power shortage. This decision would trigger price increases for the metal as China leads the aluminum production market with a capacity of 12.6 million metric tons in 2007.

·        Chinese Forex Reserves and its dependence on US Dollar

 

image009.gif

Source: State Administration of Foreign Exchange, People's Republic of China.

 

China’s forex reserves were minimal in 1978 when reforms were initiated. Export-driven high reserves during the eighties were wiped off by the high trade deficit periods of 1985 and 1986. The recession during the late eighties reduced imports. However, high FDI inflows kept the reserves at a healthy level. With China joining the World Trade Organization in 2001, FDI inflows exceeded US$60 billion in the period 2004–06. As of March 2008, forex reserves stand at around US$1.6 trillion. China has parked most of these reserves in US treasury securities (US$ 502 billion as in April 2008). The Chinese Central Bank stipulates its State Banks to hold their reserve requirements in dollars rather than Renminbi, thereby increasing the buying of dollars. The central bank thereby delegated a part of its work of managing the foreign reserves to the state banks. Piling huge amounts of foreign funds through commercial banks has, however, increased the country’s risk exposure (if the Renminbi rises against the dollar or the euro). Huge reserves come with their own handicaps like:

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      • China would have to place more importance on the exchange rate control rather than manipulate the macro economy through monetary measures;
      • High inflows limit the government’s ability to cool off the economy by raising interest rates.

Around seventy percent of China’s forex reserves are held in US denominated assets. With a low rate of return from US treasury bonds, the country may be better off investing the same in domestic projects. With the dollar depreciating by the day, Chinese reserves are taking a hit. Analysts estimate that the country loses around US$15 billion per month on its reserves. The US government has resorted to many measures, including rate cuts and monetary injections, to ward off the credit crunch situation. Consequently, losses on Chinese forex reserves are mounting on account of no visible action from the Federal Reserve to halt the fall of the dollar.

The Chinese Central Bank is contemplating to shift the reserves from the dollar to other stable currencies, such as the Euro and the Canadian dollar. China has already divested about 5 percent of its current US holdings. To diversify the risk and obtain more returns, the country created its sovereign wealth fund, the China Investment Corporation (CIC), on September 29, 2007. The fund has already obtained a 9.9 percent stake in the US investment bank, Morgan Stanley, and invested around US$3 billion in Blackstone. The latter investment created a huge public outcry in the country when Blackstone fell by about 30 percent in the post IPO phase. CIC’s funding strategy of borrowing in Renminbi and investing abroad requires heavy financial muscle. Though the government borrows domestically at 3 to 4 percent for CIC, a much higher rate of return would be required to achieve breakeven, considering rising inflation and Renminbi appreciation. Analysts feel that China would be better off if it uses the reserves for its own development activities rather than funding the US trade deficit. Of course, my suggestion would be for the Chinese to find better financial advisors and/or managers. Over the period where Blackstone fell 30%, my proprietary trading account (powered the same research that I release to this blog) has gained many multiples of that while taking much less risk than a single holding investment. Sometimes the value is to be found it the smaller intellectual property and service vendors.