Asian Decoupling is here and I told you So

[Maybe2]

You should read your guru Peseks' latest on bloomberg..decoupled done and dusted my buttocks

[to vulchan]

"...You WEREN'T and AREN'T correct, you WERE and ARE the village idiot..."

OK, anonymous guest poster...please provide evidence to this effect. 

Which bit.  The village idiot part is self evident.

Why do you continue to work in an industry when you despise the way they make money and hence pay you?

[Vulcanl]

"...You should read your guru Peseks' latest on bloomberg..decoupled done and dusted my buttocks..."

I did and he does not substantiate exactly how it is that China is NOT providing crucial support to Asia. 

So I disagree with him on this.

[Vulcanl]

"...Why do you continue to work in an industry when you despise the way they make money and hence pay you?..."

Because it is extremely difficult to change careers, especially in this environment. 

So what I am and will continue to do instead is to do my best to make it a better industry.

[Malaysian Expat.]

"...You should read your guru Peseks' latest on bloomberg..decoupled done and dusted my buttocks..."

I did and he does not substantiate exactly how it is that China is NOT providing crucial support to Asia. 

So I disagree with him on this.

I think he implied that China doesn't need a lot of things from the rest of Asia.

Manufactured goods: Buy China first

Commodities: Australia

New innovation and technology: USA and European Companies, or may be Japan, South Korea and Taiwan

Financial services: Hong Kong and Shanghai

A decoupled 'China' may be bad for Singapore which relies a lot on trade between China and the West.

May be some rich Chinese may decide to come to live in Singapore just like the rich Indonesian and Malaysian Chinese. Singapore is a small country and you'll only need a tiny percentage of them to come.

[Kubes.SG]

"...You should read your guru Peseks' latest on bloomberg..decoupled done and dusted my buttocks..."

I did and he does not substantiate exactly how it is that China is NOT providing crucial support to Asia. 

So I disagree with him on this.

Well I disagree with you.  The story in China is bad, very bad.  The numbers we are seeing from our business show that consumer demand is collapsing fast, in fact the fastest rate in Asia.  India is still strong while most other Asian markets are struggling, but not collapsing.   And this is in a bell-weather industry that correlates very strongly with the underlying economic health.

I read the article too, and Pesek was pretty clear:
1) China's soft and subtle protectionism
2) China's recovery is more spin than reality

He goes on to provide quite reasonable basis for these statements.


‘Buy China’ Pesticide Withers Those Green Shoots: William Pesek

Commentary by William Pesek

July 3 (Bloomberg) -- So you think China’s 6 percent growth will power a global recovery. Think again.

Economists, for example, can’t put a gloss on how ugly Japan’s data are getting. Exports and output are plunging, unemployment is at a 25-year high and those all-important summer bonuses are evaporating. The best we can say is that sentiment among large manufacturers was less gloomy in June than expected.

Where is that smidgen of hope coming from? China, which rarely misses a chance to declare victory over the global recession. Officials in Beijing say stimulus spending and record lending are sparking a recovery in the third-biggest economy.

Export-led Japan would seem perfectly placed to benefit. That is, until you check the evidence. Shipments to Japan’s biggest trading partner fell 29.7 percent in May, more than April’s 25.9 percent. It suggests China’s growth isn’t helping the rest of Asia very much.

China acted quickly to shield its economy from the global crisis. Manufacturing in May expanded for a fourth month. Central bank Governor Zhou Xiaochuan says things may keep improving in the third and fourth quarters.

It’s also worth noting that Japanese exports to China are falling less severely than elsewhere. Shipments to the U.S. fell 45.4 percent in May. Exports to Europe slid by the same amount.

No Engine

China isn’t turning out to be an engine of growth for Asia.

One possible explanation is protectionism, as China works to encourage exports while curbing imports. The country objects to the “Buy American” provisions in U.S. stimulus efforts, yet it is using similar tactics. Another reason may be that China’s revival is more spin than reality.

Either way, talk that China would feed the “green shoots” dynamic that Federal Reserve Chairman Ben Bernanke introduced into Wall Street’s lexicon four months ago isn’t working out. Nor will the Asia-decoupling theory that’s being resurrected.

Yes, Asia is less reliant on the U.S. than it was a decade ago. Its fortunes are still intricately tied to what happens in the $14 trillion U.S. economy. The longer the U.S. is on its back, the harder it will be for Asia to maintain modest growth.

One reason for a resurgence of the decoupling argument so convincingly debunked last year is actual growth. Even with the U.S., Europe and Japan mired in recession, economies in China, India, Indonesia, the Philippines and Australia are still expanding. That’s impressive given the state of credit markets.

Fast Forward

Fast-forward one year, though. If the U.S. economy is still weak in July 2010, Asia will have a hard time supporting growth from within. At the moment, stimulus efforts are starting from a low base. Over time, government spending and low interest rates may get less traction.

The Asian market won’t close the gap. Much of the region’s internal trade involves intermediate goods used in the production of other products -- many of which go to the U.S. and Europe. A world without growth will force Asia to retool economies toward greater domestic consumption without the cushion of robust demand.

What’s more likely is an inward-looking period as opposed to regional cooperation. Groups such as the Association of Southeast Asian Nations talk a lot about linking their combined fortunes and outlooks. Meetings, photo opportunities and communiques don’t hide the stark reality that Asian economies compete more with each other than join hands.

‘Buy China’

China has been expanding efforts to help exporters with bigger tax benefits, loans from state-owned banks and other steps. Many “Buy China” directives are coming from Beijing. And don’t expect China to allow the yuan to appreciate much in the second half of 2009, regardless of market pressures.

Such policies suggest China is losing confidence in its 4 trillion-yuan ($585 billion) stimulus plan. They are also a reminder of the limits to governments’ ability to boost growth with public largess alone.

Growth may slip as stimulus spending wanes amid political opposition to a widening fiscal deficit, says Ma Jun, Deutsche Bank AG’s Hong Kong-based China economist. That casts doubts on predictions that Chinese gross domestic product will expand 8 percent in 2010.

The omnipotent reputation many assign to leaders in Beijing is being challenged. Take this week’s Internet fiasco. China postponed the deadline for personal-computer makers to include state-backed anti-pornography software on new PCs after U.S. officials and business groups urged it to scrap the rule.

China is normally a model of implementation. The speed with which it builds state-of-the-art airports, high-speed rail lines and Olympic stadiums is impressive by any scale. Its censorship efforts were exactly the opposite: sloppy and ill-considered.

Economic-stimulus efforts appear to be benefiting from greater competence. That may be a boon for 1.3 billion Chinese trying to get a share of the nation’s growth. The benefits for those outside China are much more limited.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

[yeah well]

Vulchan would disagree wouldn't he, clearly doesn't fit with his misguided views.  Not really a surprise.

Just waiting now to see how the hypocrite singlehandedly changes the banking industry from ops.  Maybe he refuses to settle trades he dislikes as they sure as hell won't ask his opinion beforehand.

[Vulcanl]

yeah well,

After all that has been said and done one would think that the front office and their minders would get their act together and at the very least prevent any further disruptions, but no.  These people are congenitally incapable of doing the right thing. 

Looks like these shops need more operations professionals to improve their controls.  I happen to enjoy what I do for a living and will indeed continue to strive to improve the standards of business practices:

‘Rogue broker’ blamed for oil spike
By Javier Blas and Izabella Kaminska in London

Published: July 2 2009 12:07 | Last updated: July 2 2009 20:26

The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.

PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.


London-based PVM said it had informed the Financial Services Authority, the UK regulator. But officials at the Commodity Futures Trading Commission, the US regulator, claimed they had been kept in the dark for several hours in spite of an agreement between the watchdogs last year to exchange such market-sensitive information spontaneously.

Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.

Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.

Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally. Oil prices on Thursday fell to $66.5 a barrel, down almost 10 per cent from Tuesday’s peak.

The Financial Times has identified the PVM broker as Steve Perkins. PVM declined to comment and Mr Perkins could not be reached. Fellow traders said Mr Perkins was considered an experienced broker, well-regarded in the market.

This is the second episode of rogue trading in the oil market this year. In May, an oil trader at Morgan Stanley was banned by the City watchdog after he hid from his bosses potential losses on trades made under the influence of alcohol.

The incidents come as regulators are considering tougher oversight of the commodities markets after policymakers complained that speculators fuelled last year’s surge in oil and agriculture prices.

The involvement of PVM is ironic considering the company’s head, David Hufton, has been an outspoken critic of speculators in the oil market, calling some of the exchanges “electronic oil casinos”. In 2006, he said that “if futures exchanges did not exist, oil prices would be a lot lower”.

The $10m loss is a heavy blow for PVM, which reported profits of just $5.6m in the year to July 2008, according to its accounts.

[yeah well]

Operations isn't a control function.

Some reconciliations I suppose but they are, surprise, an operational function that enables stuff to happen.  Product and financial control, risk management (sometimes), audit and maybe LCD are actively control functions.  Operations isn't.

If you disagree then please tell me exactly what you do that you think is a direct control (and designed to be a control rather than a by product) over front office.

[Vulcanl]

Kubes,

Welcome back.  I missed you.  Here are my comments on Pesek's piece:

"...So you think China’s 6 percent growth will power a global recovery..."

As you know, all I have ever stated is that Asia will enable its own growth.  He starts off with the premise that China will lead the World out of depression, which I myself have never stated

"...Shipments to Japan’s biggest trading partner fell 29.7 percent in May, more than April’s 25.9 percent. It suggests China’s growth isn’t helping the rest of Asia very much..."

Here he extrapolates the Japan-China relationship to the rest of Asia which as we both know is not a valid comparison.  There are myriad reasons why Japanese exports to China should suffer to the benefit of EM Asia (which of course Japan is not part of)

"...It’s also worth noting that Japanese exports to China are falling less severely than elsewhere..."

This strikes me as a contradiction of the gist of his commentary (which we need to keep in mind is what this particular piece is - he does not delve too deeply into facts but rather projects to 2010 as to what may happen)

"...China isn’t turning out to be an engine of growth for Asia..."

This is just his statement, with no data to back it up

"...Even with the U.S., Europe and Japan mired in recession, economies in China, India, Indonesia, the Philippines and Australia are still expanding. That’s impressive given the state of credit markets..."

So even he agrees.  By definition decoupling has occurred

"...Fast-forward one year, though. If the U.S. economy is still weak in July 2010, Asia will have a hard time supporting growth from within. At the moment, stimulus efforts are starting from a low base. Over time, government spending and low interest rates may get less traction..."

And here is where he projects out to one year from now.  Lots of maybes here

"...A world without growth will force Asia to retool economies toward greater domestic consumption without the cushion of robust demand..."

I have said as much here.  Asia WILL decouple because it HAS to

"...What’s more likely is an inward-looking period as opposed to regional cooperation..."

Another projection not backed by data.  In short, just his opinion (which I respect)

"...And don’t expect China to allow the yuan to appreciate much in the second half of 2009, regardless of market pressures..."

More opinion not backed by data.  Again I disagree but respect it.

"...Economic-stimulus efforts appear to be benefiting from greater competence. That may be a boon for 1.3 billion Chinese trying to get a share of the nation’s growth..."

Here he acknowledges that stimulus has worked

"...The benefits for those outside China are much more limited..."

I don't see how he can state this with a straight face.  China's needs from the outside World are enormous

[Vulcanl]

yeah well,

"...Operations isn't a control function..."

Of course it is

"...Some reconciliations I suppose but they are, surprise, an operational function that enables stuff to happen.  Product and financial control, risk management (sometimes), audit and maybe LCD are actively control functions.  Operations isn't..."

KYC/AML/Client take-on, Trade confirmation, Cash management

"...If you disagree then please tell me exactly what you do that you think is a direct control (and designed to be a control rather than a by product) over front office..."

I have already covered this ground here and do not like to repeat myself

[yeah well]

So bank recs and confirms, yes are controls.  They are controls over operational issues though, not front office behaviour.

You check the money in/out is in line with what was expected from the trade terms, not determining whether pricing is ok or if it is a good plan to sell callable range accruals to pensioners.

[Vulcanl]

Yeah Well,

You raise a good point.  The Front Office should start checking in with Ops for trade approvals prior to execution.  Makes sense as this is where the common sense resides in any organization.

I will start pushing for just this in my own firm. 

Will report later as to progress!

[JB*]

Hi Kubesy, good to see you back you old tart. How was the airport?

What do you think about the recent price spike at "The Sail"?

Good thing or bad?

Well, its OK for me but I mean for Marina Bay and the World Class City in general.

JBA

[Vulcanl]

OK, it's been fun making the front office look silly, but it is now time for facts and figures.   Below is a good source of information.  In a nutshell mr. market likes EMs.  In this relative World of central-bank induced liquidity on steriods, this fact alone needs to be kept front and center:

Emerging Market Equity Share at Record; China Tops $3 Trillion
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By Michael Patterson and Laura Cochrane

July 3 (Bloomberg) -- Developing countries’ share of worldwide equity value climbed to a record as the fastest- growing economies lured investors amid the first global recession since World War II.

The 22 nations classified as “emerging” by index provider MSCI Inc. comprise 24 percent of world market capitalization, up from 18 percent at the start of this year, the highest proportion since Bloomberg began compiling the data in 2003. China shares surpassed $3 trillion yesterday for the first time since August, from $1.8 trillion at the end of 2008.

The increase signals growing confidence in developing countries as equity investors, spurred by interest-rate cuts and stimulus plans, redeploy cash after the worst U.S. losses last since the Great Depression. The MSCI Emerging Markets Index rose 35 percent, beating a 2.9 percent advance in the MSCI World Index of developed economies and lifting the value of stocks to $8.5 trillion from $5.1 trillion in 2008

“Everyone is trying to jump on that bandwagon,” said Nicholas Field, who helps manage about $11 billion in emerging- market stocks at Schroders Plc in London. “There are projects in emerging markets in which I can make more money than I can in the West at the moment.”

Developing economies will probably expand 1.6 percent as a group this year and 4 percent in 2010, according to the Washington-based International Monetary Fund. Developed nations will contract 3.8 percent in 2009 and have zero growth next year, the IMF forecast in its April World Economic Outlook report.

China Stimulus

Investors poured a record $26.5 billion into developing- nation stock funds in the second quarter, with China receiving $3.8 billion, according to data released yesterday by EPFR Global. The funds overall attracted $972 million in the week ended July 1, resuming net inflows after the first decline since March the previous week, the Cambridge, Massachusetts-based research firm said.

China’s market capitalization has jumped more than fivefold from about $500 billion at the end of 2003, according to Bloomberg data that includes common and preferred stock. The Chinese economy more than doubled in that time to $3.8 trillion, according to the World Bank.

The world’s third-largest economy after the U.S. and Japan has been boosted by a 4 trillion-yuan ($585 billion) stimulus package and five reductions to the key one-year lending rate in the last four months of 2008. The Shanghai Stock Exchange Composite Index rose 70 percent this year.

Recovery

Investors should buy emerging-market equities rather than European stocks to benefit from China’s stimulus measures and a rally in commodities, Fortis Investments strategists Joost van Leenders said yesterday, adding to his already “overweight” position in developing economies. Fortis manages about $240 billion.

The Reuters/Jefferies CRB Index of 19 raw materials rose 13 percent in the three months to June 30 after falling for three quarters.

The MSCI Emerging Markets Index was little changed today, dropping 0.06 percent at 12:56 p.m. in London. It plunged a record 54 percent in 2008 as the financial crisis, which started with the collapse of the U.S. property market in 2007, triggered more than $1.47 trillion of losses at financial institutions worldwide and led to the seizure of global credit markets.

$75 Billion Bailout

Some $67 billion was pulled out of emerging-market equities and bond funds in 2008, EPFR data shows. Investors returned to become net buyers of emerging-market stocks this year on prospects government stimulus plans, interest-rate cuts and the potential of as much as $750 billion in International Monetary Fund support.

The IMF has so far pledged more than $75 billion to bail out economies hurt by a lack of credit and plunging exports. Romania, Hungary and Ukraine got a combined $50 billion in aid.

All 10 of the world’s best-performing indexes in the second quarter are developing markets, led by Ukraine, Vietnam and Kazakhstan, according to data tracked by Bloomberg.

“You have to remember how much emerging-markets fell and how much capital was withdrawn last year, so some of it is a kickback from that,” Schroders’ Field said.

Brazil, the world’s eighth-largest economy, has reduced taxes and cut the benchmark interest rate at all four policy- meetings this year in a bid to help Latin America’s largest economy recover. The market capitalization of the nation’s shares reached a year-high of $952 billion last month and was at $920 billion yesterday, Bloomberg data show.

Cutting Rates

The Reserve Bank of India, the fourth-biggest emerging economy, reduced borrowing costs six times in seven months and the government announced three stimulus packages comprising about 7 percent of gross domestic product. The market capitalization of Indian equities is at $989 billion after reaching a 10-month high $1 trillion last month.

Russia’s government has allocated $81 billion in stimulus spending this year on loans, state aid and subsidies to battle an economic contraction of 10.2 percent in the first five months of the year, when industrial production slumped a record 17.1 percent in May.

The country’s Micex Index last month became the world’s first benchmark equity index to enter a bear market since global stocks began rallying in March, tumbling more than 20 percent from a June 1 peak. The Micex dropped 2 percent today to an eight-day low. Russia’s shares have a market capitalization of $339 billion.

The annual gross domestic product of India and Brazil have more than doubled since 2003, while Russia’s economy has more than tripled to $1.6 trillion.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net. Laura Cochrane in London at lcochrane3@bloomberg.net