MANDARIN PACIFIC ASSET MANAGEMENT 

LESSONS LEARNED FROM THE 2008 COLLAPSE  AND GREECE

 (APPARENTLY NONE)

The global growth engines in todays world are India and China.  The U.S. Japan and Europe  show little real growth.  Until growth accelerates I see no need for higher interest rates.

Ever hear of the labor force participation rate?  Today there are more people choosing to not work than ever.  Maybe they are semi retired, defeated, or after taxes make more on food stamps than they would at $13/hr.  The point is there is a vast underutilized pool of talent that is a core contibutor to  the lack of growth.  Stop looking at the meaningless unemployment rate.  If you are not looking for work you do not count in that statistic.   According to the U.S. Bureau of Labor Statistics there  are 8 million people counted as unemployed yet 93 million non working Americans.  The real unemployment rate is 37% not 5%.

Age is a big contributor to our lack of growth.  Baby boomers (about half the U.S. population) and their spending, are retiring.   Economic growth, and tax revenue will decline significantly over the next 20?? years.  The U.S. Office of Management and Budget has forecast  much larger budget deficits, beginning 2015, due to increased Social Security and Medicare payouts.  A giant wave of negative cashflow is coming.  The U.S. needs 4+% rates of real growth to pay the bills.

Still some see the need to reduce the growth in wages and real estate bubble.  Never mind that most of the growth in minimum wages has come from cities mandating  higher wages not from the goodness of employers.  And unless you are in a top 10 city you have only read about the big gains in home prices.

The Alternative Plan. The regular Yellen threat of higher interest rates has gotten in the way of solid policy.  A smarter approach would be to slow spending through existing sequestration.  Then cut interest rates, and corporate tax rates, to provide relief.  The goal being a weaker dollar export based economy. There is a very short window to make those changes or the markets will force them upon us. ( Remember the causes of 2008?)

Growth in corporate profits is mixed.  New product introductions (fewer these days due to lower R&D spending) and increases in market share are fueling these gains.  And despite all the CNBC chatter China and India continue growing in the 7% range.  Those countries, and their 2.5 billion consumers, are likely to provide most of the global growth for many years to come.  People might be poor, but everyone knows you do not have to remain that way.  This is where the missing U.S. cap ex spending has gone.

The world has undergone a large socialist experiment.  What we created is global massive underemployment, unsustainable spending, a much more dangerous world and a government that does not care.  The U.S. presidental election campaign is beginning in earnest. Let's hope a reasonable candidate emerges that addresses these issues.  Issue #1: how to turn those 93 million couch slackers into productive wage earners.

No matter who wins the election I believe demand will increase consistently for the basics: clean water, telephones, smarter software, homes, pharmacutical drugs, food and even soap.  Those are the kind of companies we look to place our clients assets.  

Roger O. Groh

7/20/15

INFO@MPAM888.COM

1001 Bridgeway #418, Sausalito, CA 94965  USA

China Friend or Foe?

China: Friend or Foe?  It all started when Pres Obama said the U.S. would no longer act as the Asian military buffer, or back Japan.  Then compounding the problem Mr. Obama  announced the U.S. would not defend new eastern europe states.  Quickly Russia moved to reconquer their old satellite countries and China made a military move to control the South China Sea.  At that same moment Isis was born.
I promoted the belief that a stability demanding rapidly growing middle class would bring a world friendly China  With the U.S. as a buffer, the Chinese had no major military fears.  Do the Chinese really fear a Japan or Russian takeover?  With the buffer removed the searing memories of WW11 appeared.  China's decision to protect itself makes sense.
During the first years of new Chinese leaders the military has proven aggressive, backing off once the new President consolidates his position.  Mr. Xi's first term is no exception with the military claiming ownership of the South China Sea.
This month the U.S. was asked to co occupy several Phillipine military bases.  Equipment, troops and most important, the American flag sit on two islands 11 and 52 miles from the widely claimed Spratly Islands.  So expansionism has likely ended.
But that will not suffice.  To avoid Iranian type U.N. sanctions, or a fight, the Chinese must withdraw back to the mainland plus 10 miles.  Sanctions typically result in a collapsed stock market and economy.  It would probably also bring about the removal of a, potentially moderate, President Xi.  The U.S wants neither but cannot placate militant China.
In the past I have avoided investing in countries which threaten world peace.  Russia, and it's nuclear arsenal pointed at the U.S., is an example.  Is that now true of China?  Today U.S.military sons and daughters are now tasked with holding the front line and reversing China's expansionism.
We will sell our China mainland investments and hold Hong Kong, Macau and Taiwan.  If the Chinese moderates prevail, and militarism ends, we shall re evaluate.  Morally how can any U.S. public plan also fail to exit China?
Roger Groh
05/26/15

MANDARIN PACIFIC ASSET MANAGEMENT

OPEC CHRISTMAS

2014 is ending strongly.  The next two years look stronger yet with U.S. Government forecast of for 4.1%(2015) and 4.4%(2016) versus  2014’s 2.6% estimate).  U.S. budget deficits also declined. Give most of the credit for this heady growth to OPEC and their willingness to let gas prices decline.  The effect is much like tax cuts which has put an extra $80 Billion in consumers pockets, fueling growth.  It is a shame the Obama administration let political goals  have priority over prosperity.  After all the U.S. would of exited the great recession quickly if income taxes had been reduced.  With the poorest and retired the most important beneficiaries of increasing GDP why is that not a goal?

Globally India and China (with combined population exceeding 2.6 billion) are expected to be the major long term drivers of global growth.  7% growth numbers look good compared to poorly managed, no growth Latin America and Europe.  

Strong U.S. growth pressures the Federal Reserve Board to begin raising interest rates.  But the Fed is loathe to make that move given anemic global growth and deflation, not inflation, being a considerable threat.  If I were an interest rate decision maker I would ask for data on several points: 1. Are there enough bodies to meet demand? The answer today would be yes.  Unemployment is down, but many workers seeking full time employment have taken lower paying and temp jobs to make ends meet.  Bottom line no wage inflation. 2. Can we produce the goods needed with the factories that exist?  In November we used 80.1 of maximum output.  It is a great problem meaning things are going great, but means less every year as many goods can be made in other countries and imported.  No concern.  3. Is there a need to manage our currency via aggressive interest rate policy (like Russia is doing today)?  No there is not. 4. Biggest question is how bond yields are changing given recent data releases.  After all, the Fed makes moves in response to the bond market. I would be vocally preparing the financial world higher interest rates may be coming but do nothing.

Of course there is a preferable alternative to raising interest rates.  The U.S. has big budget deficits.  Suppose the rate of increase in government spending was cut.  Think about it.  Economic growth would slow, interest rate pressure would decline and budget deficits would shrink.  With the Republicans controlling both the Senate and House it may be possible.  And rhetoric aside, cutting spending would hurt the poor and people on fixed incomes less than increasing interest rates.  Eventually there will be another recession.  When that happens we should do the reverse and dramatically increase government spending, and deficits, to spur demand.

Last Thoughts:  OPEC is saving the world by permitting oil prices to decline.  But  commodities, including oil, usually increase in price as inflation accelerates.  So if you want keep your gas prices permanently low buy the oil stocks as a hedge.  

I hope you and your families all have a wonderful holiday season.

Roger O. Groh

12/28/14

roger@mpam888.com

1001 Bridgeway #418, Sausalito, California 94965

The good news, economist Ed Yardeni points out, are estimates of corporate profits 12 months ahead show significant growth.  So gradually things have kept improving.

The bad news is the U.S. is running unsustainable budget deficits.  The President and democrats are seemingly oblivious to the consequences.  Republicans want to rein in spending but lack the votes to change policies.  On Thursday this could come to a head as the government reaches a self imposed borrowing limit.  The debt is so overwhelming large that the government must borrow more money to pay bonds that come due now.  (Did not Madoff go to jail for doing just that type of shell game?)

The immediate consequences of not paying back bondholders include higher interest rates.  Also most insurance companies and banks hold bonds as part of their capital structure. If those issues become worthless, even for one minute, most financial companies will fail to meet the minimum capital standards.  That means they are bankrupt.  Remind you of 2008?  It should but then it was derivates which became worthless.  The government stepped in and guaranteed their payment to avoid complete collapse.  There is no way the government can guarantee its own default.  Expect chaos.

My view is the $1.5 trillion in overspending was going to come to a head within a few years debt deal or not.  A Greek type collapse would occur.  So it is awkward, hard, expensive and embarrassing for the U.S. to go through today’s reality show.  But is better for everyone to solve the problem and not let things go the Greek way.

What do I think will happen?  Interest rates will spike beginning now. The stock market will go down substantially.  It could be a 50% decline. Eventually (months?) there will be a debt deal.  The bank regulators, a future deal in mind, will issue a capital waiver and keep companies out of technical bankruptcy.  That does not help companies who need their treasury holdings to be repaid so they can pay bills.  This includes some giant mutual funds and money market funds. 

In the past when U.S. stocks collapse so do international stocks.  A market collapse would be a great opportunity to add stocks.  We will add shares in companies which make products we use everyday, recession or not.  Food, water, power, phone service are examples.  We expect a significant rebound in stock prices whenever a debt deal is reached.

What can you do?  Email and call your Congress members and lobbyist.  Say overspending and socialism are bad for business and America.

Roger O. Groh

10/15/13

GROH ASSET MANAGEMENT

(Why You Never Want) WAGE AND PRICE CONTROLS

Remember back in the 1970’s when the government imposed price controls on fuel and other items?  Then you also remember what happened when the caps were removed.  Prices zoomed, inflation took off and it cumulated in the early 1980’s horrible recession.  30 year Treasury Notes yields hit 14.68%.  Unemployment was 11%.  All caused by the foolhardy political notion that prices could be controlled.

Politicians with short memories forgot the 1970’s lessons.  Several years ago the U.S. imposed price controls on interest rates.  That is why treasuries yield next to nothing.  Investors seeking yield and growth, with little risk tolerance, have been forced to put their money in, much more volatile, asset classes like real estate and the stock market.

Last year the Congressional Budget Office (very accurate, non partisan financial forecasting arm of the U.S. Govt.) published a note about what would the (then) pending U.S. spending cuts mean to overall growth.  The forecast: growth would slow to around zero economic growth for a year, followed by above average growth. The cuts started in March and so far the forecast seems accurate.

If the economy grows as forecast by next spring GDP could be growing at a 4% maybe 5% rate. A hint of even 1% growth would likely cause the interest rate price controls to be removed.  Interest rates would instantly rise from near zero to a normal 5%-8% range.  And all those people who really did not want to own volatile investments will turn into wildly stampeding sellers. 

When the interest rate caps will be lifted is unknown.  Could be tomorrow or year end, but soon.  Lifting all controls at once would create unnecessary chaos and hardship.  I have become a noisy Bush era ex Federal Reserve Board Official arguing lifting them now sector by sector is the best approach to a problem with no good answers. Begin the cap exit today by permitting mortgage rates to rise now and follow with other sectors in the fall.

So, you want to make money? You could short real estate,  short bonds and short the U.S. equity market.  There is significant risk in that approach.  However betting interest rates will rise over the next year seems reasonable. Go long interest rate futures with a portion of your investments.  We can help you make those investments.  Make your plans now, not later.  Decide what stocks and real estate you can emotionally and financially handle owning at less than half of todays price.  Sell the rest now, put it in boring guaranteed money market accounts or short term treasury issues.  The waiting is going to be hard especially if prices going up and you are not invested.  Be patient.  I might be wrong but my thoughts echo Buffett, Goldman, Gross and a host of other very smart investors saying watch out.

Roger O. Groh

SAM’S THEORY OF ECONOMICS

Historians of the 1930’s Great Depression point to a series of errors the U.S. Government made resulting in the worst period of economic performance in history. The one overriding lesson is that, just like 2010, higher taxes and increased expenses stripped corporations and individuals of spending power.

While the depression took hold the shunned English economist, John Maynard Keynes, argued that we were doing it all wrong. “Don’t be fools, put money in their pockets not take it out!” said Keynes. President Franklin Roosevelt was not sure Keynes was right. But did believe if he put cash in people’s pockets he would get their vote. So, the era of Keynesian economic theory was born. The government stimulus packages you have seen in 2009 and probably 2011 are Keynesian once again.

The problem is that Keynes discovered massive government stimulus could stabilize an economy and banking system. But, did not restimulate significant long term growth. During Keynes time WW11 provided the jobs and growth to put people back to work. The biggest question facing our country today is how, short of a larger war, to stimulate demand.

Japan entered into recession during 1990. They are still in the recession today. 20 years!! Why? As Japan raised taxes and expenses, decreasing competitiveness, companies moved to cheaper countries. The Japanese government also has tried to cover that loss by using stimulus packages many times. Are we foolish enough to make the same mistakes? Does the U.S. want to remain in perpetual recession? .

Enter Sam Walton who never met a product he did not like, as long as he could sell it cheaper than anyone. Could the U.S. use Sam’s company, Wal Mart, as the role model? No I do not mean the government should buy retailers. But by having the lowest income taxes, and fewest government controls, of any country. “If we are the cheapest the corporations will come”.

Our “competition” are other countries which are taking our companies, capital and jobs, by implementing these exact cost reduction strategies. China and Hong Kong reduced income taxes while the U.S. raised theirs. The GDP score in this game? China growth 10% per year. The U.S.? A big fat Zero.

We forgot what Keynes discovered and Sam always knew; you can only succeed if you are the least expensive guy on the block.

Roger Groh

10/7/10

Roger@Grohasset.com