Questioning the new inflation bugs.
Dear Mr. Faber,
We nearly ran into each other a number of times over the past many years. Perhaps one day we will.
I just saw your interview in Swiss German on www.Cash.Ch Bravo.
A point I would add is that in many commodity markets China is increasingly becoming a net exporter of commodities -not the ever larger user/consumer as so many commodity bulls want us to believe.
I can send you a sample below of what I mean with this. One asset class you perhaps not dare to mention is Thai smaller cap value shares. I have solid evidence at here, and this for many years already, that as an asset class it has beaten almost all others, including Gold and Oil.
Attached I show you a teaser-graph. Below I share one article with you on why the re-inflation cycle might not get going as fast as you fear/hope. I have other analysis at hand which supports this. In any event, my forte are Thai smaller cap investing...a subject I know much about and often make the company visit rounds in Bangkok, since 1997.
Schoene Sontag's und Gruesse from Phuket.
Paul A. Renaud. Thaistocks.com
November 1 2006.
An open letter to a US friend whom pointed out the US republican politicians are about to fall out of favor.
Its hardly just the US politicians, my pall. I well know it is currently fashionable -besides the new reality- that the republicans are loosing it and US political changes are coming soon. Its about time. Yet, I could write many other realities which put the US people at some, dare I say shame; or more politely stated, in the dark.
While many there are busily consuming away thinking its business as usual, here I rant on just one such theme. There are many more. My (admittedly unproven) impression is that Americans and to a lesser extent Europeans have not generally credited the Chinese for the vast improvements that China brought to their lives!
Besides having kept global inflation in check for many years, in the ever over-extended US economy (see below), consider the some 1 trillion US$ in treasuries the Chinese government hold as legal reserves. In absolute fact, this has kept US and EU interest rates artificially very low, for many, many years already.
The point being that the Chinese people have brought allot of good to the West and this is so often naively just mostly ignored by John Q Public in the US public -as well by most its flippant politicians. Job losses, piracy and pegging the currency too low are quick to be expressed there, but rarely if ever, the enormous benefits gained by the West! Just go outside a Walmart and ask people walking out of there if they feel any gratitude to the many poor Chinese for providing such low priced consumer items?
Few if any at all will answer affirmatively, instead they will think your weird, turn their backs and walk away. Or ask a US Mortgage banker, if the US housing boom (which brought such incredible wealth to a whole baby boomer generation all across the US, has anything to do with the Chinese, and they will think your off the wall.
Yet the US housing boom, now fading, has mostly to do with the Chinese as it is they whom should be credited with low inflation and US/EU interest rates! China has been exporting deflation in manufactured/consumer products for a decade and this will probably only accelerate, in the medium term. Americans and Europeans are increasingly living out their lives by a cornucopia of products made in China.
This, some of us well know and I think it has further room to magnify. However the fat profit margins enjoyed by super global retailers are about to be clipped, we will see. I am told that if you tour some cities in China the prices offered there an incredible fraction of what the price of these products sell for in USA, and even more so in Europe. Many consumers are impressed by global retailers such as WalMart, Target , Home Depot, Tesco, Metco, Carefour etc.. in offering super discounts on hundreds of products from toasters to electronics to cutlery and much more. How can they sell this stuff so cheap, the housewife and man on the street alike ask?
But I am questioning how can these EU/USA super stores get away charging such hefty mark-ups without incurring a consumer backlash? These super stores/companies all owe their ranking in the upper echelons of the worlds 500 largest corporations in recent years, due in large part for the high-profit margins they earn from procurement in China! (I believe these fat margins are unsustainable).
The famously cheap toasters which Wall Mart brags about in USA and sell for 11 US$ would seem outrageously expensive in Yiwu China, where they can be bought for half this price. Or a Chinese-made DVD which caused a sensation in America when it was put on sale for $29. This product sells for far less then that, in that same Chinese thriving city. Or how about an axe for chopping wood? A basic tool you can have for $1.20 in most Chinese cities, vs. at least double or more, in "super discount" US/EU retailers. And so on it is across the board from pencils to agri-equipment.
Has this been recognized in the quick China blamers? When I was in Switzerland I needed to buy an electric adapter plug for my lap top. So to convert my US plug to a EU conforming one. The unfriendly sales person there gave me the impression I was in luck as he just had one, retailing for 10 SFR (about 300 Baht). In China you can source the same plug for 0.30 or some 1 % of what I had to pay in Zurich. Now I ask you, what can the shipping charges be to send such a converter, even nearly half way around the world? I read some estimates that total procurement of wholesale goods buy foreign retailers was about 62 Bill $ in year 2005, this according to official Chinese estimates.
If you make the very highly conservative assumption that these goods are sold in the developed world for double the cost of their procurements, then one can conclude that some 120 Bill. US$ worth of merchandise, which is sold in European and American discount stores, comes from China. Equally shocking, you can think of a ball-park figure on the net profit margins earned by these US/EU mega stores, now ever so prolific around the developed world.
Discount prices, what discount? According to one very reliable source I read, just a few years ago the number of foreign traders in Yiwu, China (as just one example) was just a few hundred, today there are more then 5000 of them.* Chinese manufacturers routinely are content with razor thin profit margins. But not the "Walmart's of the West", whom have hugely benefited from this. Those benefits will lessen and so global inflation will/may not roar back so quickly like some believe, for example Marc Faber. My macro bet is that such profit margins by these prolific mega retailers are far too high -and as time goes on their fat margins, and so, consumer prices will drop even more?
This will keep blowing against the winds of re-inflation tendencies and so there is more room for consumer prices to remain stable -or even drop. Inflation bulls be so warned, but I remain a cautious & healthy skeptic on the recent commodities bulls thesis. Thank China for that and next time a China basher blasts on, ask him/her does he really knows all what he is talking about.
Best Regards,
Paul Renaud.
Mr. Faber answered within a few hours later:
Thanks a lot, Pls consider that inflation can manifest itself in other items than just good prices. Kind regards, Marc Faber I so replied:
Thank you Mr. Faber, very nice to hear back from you and appreciate your comment! I pondered this a bit and then looked up "inflation" in the Oxford Advanced Learners Dictionary (7th) edition, their definition is as such: "general rise in the prices of goods and services in a country" With vast & broad services increasingly being outsourced to India and other developing countries, and China increasingly producing products cheaply and at razor thin margins, one has to at least question the inflation bulls.
Best Regards,
Paul Renaud.
Thaistocks.com
