Thursday, October 22, 2009 1 comments ++[ CLICK TO COMMENT ]++

Two contrarian views: Ambrose-Evans Pritchard very-long-term bullish on US$; Andy Xie very concerned about real estate in China

Here are two radically contrarian views. Of course, as always, what is contrarian depends on the crowd you hang out with. I measure it against the mainstream masses (i.e. institutional investors and Wall Street as a whole.) The views I present below aren't that new to me but they go against the Street.

US$ To Remain Dominant

This is a very long-term call so it's not really actionable for most of us (unless you are willing to invest for 20 years and not touch your money.) Ambrose-Evans Pritchard, a journalist at The Telegraph, makes a widly bullish call on the US$:

The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.

Why, you might wonder, could someone say the US$ would be stronger in 20 years:

The aging crisis in Asia — and indeed the outright demographic implosion in Japan and China, not to mention China’s water crisis — will soon be obvious to everybody. Talk of Oriental supremacy will start to sound overblown at first, and then preposterous.


The UN expects America to add roughly 100m people by 2050, keeping its age balance in relatively good shape through a mix of immigration and a healthy fertility rate — now 2.12 live births per woman, still above replacement level. This compares to: Taiwan (1.13), Korea (1.2), Japan (1.22), Ukraine (1.25), Poland (1.27), Spain (1.3), Italy (1.3), Russia (1.4), Germany (1.41), China (1.77), Britain (1.96), and France (1.98). Some of this data may be slightly out of date, but the picture remains valid.

Professor Becker said a collapsing birth rate is extremely hard to reverse, and the cultural effects are insidious. Old societies are status quo. They are slow to embrace new technologies. Young minds are the source of hi-tech invention.

I agree with most of the speculation. In fact, it is quite hard to argue against them because they are basic facts. As suggested, it is also very hard to reverse demographics trends. I'm sure most are aware of massive socio-political battles fought in Japan over the decades between the "old" and the "young" with the old easily winning out—they simply outnumber the young by a wide margin and are unwilling to endorse any policies by younger people.

However, I personally do not believe the demographics situation in China is as bad as most people assume. I am of the opinion that China will eliminate its so-called one-child policy within 10 or 20 years. Although having no control over population—like India, Bangladesh, Brazil, and other heavily populated countries—has big negative side-effects, I am too libertarian to let the government dictate an individual's personal reproductive choices. In any case, even if one wasn't quite so liberal and quite so libertarian, I am sure the Chinese leadership will reverse the state-dictated reproductive policy. I haver zero faith that any government, let alone a so-called Communist-capitalist government, can control the population properly and I suspect the Chinese government itself is coming around to the view that it doesn't know what it is doing.

So, overall, China isn't as bad as it seems. Its demographic situation still doesn't look that great, and would be worse than USA's, or some other country like India, but it isn't as bad as most analysts are projecting.

To sum up, Ambrose-Evans Pritchard, who admittedly isn't an investor and doesn't have a great record based on my random observations, thinks the US$ will remain strong throughout the early part of this century, and perhaps beyond. I share the same view.

China's Real Estate Bubble

Andy Xie is an interesting fellow. I respect anyone who was fired by their Wall Street employer for saying what is likely truth. I was familiar with his writings from a few years ago, when I was also reading more of Stephen Roach (both of them were freely available on the Morgan Stanley website), but my view has always been that Xie isn't that good with his macro calls. His timing is off and some of his opinions seem contradictory with his other opinions. Where Andy Xie excels, at least in my eyes, is with his brash, controversial, calls. He is sort of like Marc Faber, except he is rooted in reality whereas Faber is just ridiculous at times. Andy Xie oftens says stuff that no one will publicly say. Even if some of his views are wrong, I often gain some insight.

Bloomberg recently conducted an interview with him and it is worth checking out if you are into China.

The key concern Andy Xie raises is that real estate is driving a huge chunk of China's growth (about 10% of GDP) and it is questionable how healthy this is in the long run. Then there is the totally ridiculous affordability ratios but it's hard to understand that ratio (this is due to many reasons including one raised in the interview: it is not uncommon to see families consisting of adults, parents, and even grand-parents pooling money to buy property. This also happens in other developing countries like India, but it is rare in developed countries like USA. Another reason it is difficult to understand affordability is because many real estate transactions are cash transactions, which technically means the buyer can "afford it". In contrast, most transactions in USA involve debt, with only the super-wealthy buying homes for cash.)

Overall, a somewhat bland interview but I did gain some insight. For instance, Andy Xie pointed out how the Chinese central bank controls monetary policy through qualitative measures (i.e. orders to banks) whereas in developed countries, it is mostly done by fiddling with the short-term interest rate. As Xie points out, the interest rate in China is largely useless when looking at monetary policy. The central bank hasn't done much with the interest rate in the last few months yet lending has been shrinking, solely because the government "told" the banks not to lend. Such a thing cannot happen in America—it may even be illegal in America.

I share similar views as Andy Xie and am concerned with a potential real estate bubble in China. In fact, I'm even more worried about a broader bubble in all fixed infrastructure.

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1 Response to Two contrarian views: Ambrose-Evans Pritchard very-long-term bullish on US$; Andy Xie very concerned about real estate in China

February 23, 2013 at 2:06 AM

Who really knows the direction the market will take.

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