Tag Archives: political economy

Investing in the PRC

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Some pundits are suggesting that the way in which the People’s Republic of China handles real estate company Evergrande’s default will say a lot about the utility of investing inside the PRC. The Wall Street Journal even is asking whether foreign investors are second class citizens “now.”

Last things first: foreign investors always have been second class citizens in the PRC. They’ve only recently been “allowed” to become equal partners or majority holders in established PRC companies being newly invested in or in enterprises being newly formed. It’s still the case, too, that as a condition of doing business inside the PRC, foreign companies must “share” intellectual and technology properties with their partners, and they must permit the PRC government to install back doors into those foreign partners’ primary software.

It’s also the relatively new case that, under the 2017 National Intelligence Law, companies must divulge any and all information that the PRC’s intelligence community requests.

Still, the Evergrande outcome will be informative.

Who is still standing when the dust clears will say a lot about the future of China as a place to invest more generally.

In particular, resolving this misconception will be informative:

Oaktree Capital has moved to seize a large chunk of Evergrande’s Hong Kong property, worth an estimated $1 billion, against a secured loan now in default—a property which could have potentially served an important role in Evergrande’s general offshore debt restructuring.

With the Xi Jinping government having, over the last couple of years, phagocyticly absorbed Hong Kong into the mainland body politic, that city no longer is offshore. Whether Oaktree will be permitted to seize that Hong Kong property is an open question, and a question subsequent to a permitted seizure will be the limits the PRC imposes on Oaktree’s disposition of that property.

I’m not sanguine.

Out of Touch?

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Or openly lying?

Small businesses are booming, according to the Biden-Harris administration.

President Biden’s efforts have not only helped millions of Main Street businesses keep their lights on and employees on payroll, they have enabled a remarkable rebound in small business activity, with small business demand for labor and inventories near record highs.

And

According to a leading survey of small business owners, the share of small businesses planning to create new jobs in the next three months is higher than it ever was at any point during the previous Administration. Another recent survey of small business owners found that 71 percent are optimistic about their own performance in 2022, up from 63 percent one year ago.

Carefully unidentified surveys. An openly identified survey, a Goldman Sachs survey, says otherwise.

86% of small business owners say that broader economic trends, such as supply chain issues, inflation, and workforce challenges, are having a negative impact on their small businesses

And

66% of impacted businesses say it is a problem for their business that suppliers are favoring large businesses over small businesses….

And

84% of small business owners say inflationary pressures have increased since September of 2021

And

Two-thirds of small business owners do not think the Federal government has done enough to address the economic trends

And

29% [of small business owners] think things in the US are moving in the right direction, reflecting a 38% decline since June of 2021.

That should be an embarrassing disconnect for the Biden-Harris administration, which makes me repeat my question: are the personages in this administration, from Biden-Harris on down, that far out of touch, or are they openly lying to us?

Either way, this is an incompetent administration, and it’s going to be a dangerous three years, domestically as well as globally.

Germany as Mediator?

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A Deutche Welle article cites German luminaries as thinking Germany can mediate the “dispute” between Russia and Ukraine.

For instance, here’s Christoph Heusgen, Under-Secretary for Foreign and Security Policy in the German Chancellery from 2005 to 2017 and upcoming Munich Security Conference Chairman:

Germany overall has assumed a more active role in world politics, and people are asking for this. There are lots of expectations that we play an important role, and we do this. You know, I mentioned the Ukraine crisis. We do this when you look at the Balkans where we are very active.

Reiner Schwalb, ex-military attaché for Germany in Moscow, though, gave the game away (as did Heusgen in the above).

Berlin is a point of contact between Europe and America from the American perspective. Despite our history, the German-Russian relationship has a certain stability. There is a great economic exchange, with cultural exchange and scientific exchange, and repeated attempts by Germany to cooperate more intensively with Russia.

“From the American perspective” is a cynically offered irrelevancy. What’s central are two aspects of the German-Russian relationship. One is this “great economic exchange.” That’s an exchange that’s based on and strengthened by Germany’s dependence—voluntarily entered into by the German government—on Russia for its energy.

The other aspect is that “repeated attempts by Germany to cooperate more intensively with Russia” business. Cooperate with Russia, especially with Russia holding—and having already demonstrated that it does—the whip hand on German energy.

Regarding Heusgen, his “look at the Balkans where we are very active” brag. Germany also has been very active in the Baltics vis-à-vis Ukraine—barring Estonia from transferring badly needed arms to Ukraine if those arms originated in Germany.

Germany as mediator—a risible concept.

“It Depends on Uncle Sam”

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Without more help from Washington, electric-vehicle sales will struggle to live up to the stock-market hype.

That Wall Street Journal lede pretty much tells the tale.

And this:

If the new technology is to live up to high investor expectations, the global record suggests that the US will need to embrace subsidies.

It depends on Uncle Sam. As long as electric vehicles get subsidies of any sort—either on the manufacturing end or to buyers of them on the other end—these battery cars can never be mainstream. As long as they’re getting any sort of subsidy, battery cars are tautologically unready for market.

Inflation Worries

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Jason Furman, ex-President Barack Obama’s (D) Council of Economic Advisers Chairman, wrote about four things about which to worry regarding the current inflation increase and its durability. Three of them were reasonably accurate. He also predicted a Fed response.

First, the economy is beginning 2022 with much tighter labor markets than a year ago. …
Second, demand should remain above pre-pandemic trends, while supply will likely continue to lag behind. …
Third, consumers, businesses, forecasters and financial markets all expect near-term inflation to be about 1 to 3 percentage points higher than a year ago. …

So far, so OK. But his fourth, not so much.

Fourth, the trajectory of Covid and its effect on inflation are highly uncertain.

In fact, it’s badly off the mark. What’s highly uncertain is the Federal government’s trajectory of variable, and often panic-hyped, (over)reaction to the Wuhan Virus. This one is beyond the ken of the Fed, or it should be, and is completely under the control of President Biden-Harris (D).

The Furman’s predicted Fed answer isn’t all that, either.

He [Fed Chairman and nominee for continuation as Chairman Jerome Powell] proved that the Fed’s actions will depend on the data, and the Fed is now on course to start raising rates in March. If inflation remains as high as I fear it will, expect him to continue to follow the data by pivoting further. Given the uncertainty, however, he should stay the course—for now.

No.

If the Fed is going to be serious about lowering inflation back into the neighborhood of its target rate of 2%, it needs to

  • stop buying Treasury debt
  • disgorge its existing Treasury debt instrument holdings (ideally by simply not rolling them at maturity)
  • set its benchmark interest rates at levels historically consistent with 2% inflation
  • sit down and be quiet instead of constantly trying to respond to every jot and tittle of market variation