Thoughts

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China Heating Up

China's National Bureau of Statistics reports that major city real estate prices rose 9% in September!

Van Eck is introducing an ETF that provides exposure to China's A shares via swaps, etc., and will track the CSI 300.

We can all now gorge at the trough!

Currency and inflation are important to China again, as the nation's economy appears to be heating up despite attempts to dampen speculation. China's National Bureau of Statistics reports that major city real estate prices rose 9% in September! Real estate investment is up 36% this year. The Chinese evidently still love their empty apartments, no matter what.

If you want to play China's A shares, a vehicle is on its way. (A Shares are off-limits to foreign investors.) Van Eck is introducing an ETF that provides exposure via swaps, etc., and will track the CSI 300 index.

Dr. Doom Predicts

If we double-dip, he will take credit for calling it. If we don't, he will say he was just pointing out the risks. Time to take a stand, Dr. Doom!

Roubini was out the other day predicting a "35% to 40% chance" of a double-dip recession, according to Bloomberg. What information is in this statement? If we double-dip, he will take credit for calling it. If we don't, he will say he was just pointing out the risks.

Mortgage Intrigue

The plot thickens.

I read an interesting thesis on the mortgage mess that goes beyond the unreviewed affidavit angle; if correct, the issues could drag out far longer than investors expect. Evidently, the problem is that REMICs (mortgage-backed securities) must get their underlying mortgages within 90 days of creation in order for pension funds to get tax-exempt treatment. Where the mortgages have documentation issues, they were in effect not legally conveyed into the REMIC within the 90-day settlement period. So, affected REMICs either have fewer-than-expected assets, legally, or if the mortgages can eventually be documented, they still won't be tax exempt.

This is a real issue. The state of Kentucky is suing several mortgage servicers under RICO for fraud!

Global Implications of Inflation

Global food inflation could induce real social unrest.

Inflation is showing up in basic commodities, especially food. Most Americans don't care too much, because food is a small percentage of the household budget. In many developing countries, however, food is a huge percentage of the budget, and global food inflation could induce real social unrest.

The Real Cost of Living

At its core, inflation is a reduction in the value of the currency. The dollar trend, down 8% in the last month against a basket, means the value of the dollar is lower, so by definition inflation is here. Tom Graff has astutely observed that the Fed's real goal is to create a little bit more inflation to help get the economy moving. I think they have already succeeded.

We don't really need a QE 2.

Most economists are worried about a round of competitive devaluations, but the real risk would be no reactions from other currencies. If everyone "devalues," there is no net change in countries' position relative to each other and thus no implicit trade war. The real winner when all currencies devalue is gold, and gold is rocketing.

Weak Capital Formation, Weak Economy

There were 8,823 public companies in 1997; now there are only 5,107.

A recent Institutional Investor article, using data compiled mainly by Grant Thornton, is throwing water on the excitement over a reviving IPO market and thus indirectly pointing out the capital formation issues that I believe are throttling back economic growth.

The IPO window naturally slammed shut during the great bear market, but it is now reviving. So far this year, 90 companies have offered shares to the public, a nearly 50% increase from the 64 IPOs in 2009. Compared to the 1990s (when economic growth was robust), this number is pathetic. Back then, over 500 companies went public each year, on average. The average for the 2000s is 126. Companies that raise capital in IPOs are able to fund growth, hiring new workers and creating new products or markets.

Of course, perhaps the anemic IPO market is a result of economic sluggishness, not a cause? Actually, there is no shortage of new companies. The National Venture Capital Association (NVCA) points out that 6,100 companies have received venture capitalist funding, so new firms are being created; they just aren't reaching the IPO stage. Ninety percent of exits are now M&A vs. 25% in 1993. The cycle from initial funding to IPO has stretched from 4.3 years to over 10 years! With less access to growth capital, the pace of growth is simply slowing.

For investors, this all means a dearth of new, exciting companies in which to invest. There were 8,823 public companies in 1997; now there are only 5,107. The NVCA estimates that we need 360 new IPOs to replace natural attrition from bankruptcies, acquisitions and the like. That is one IPO a day. At least U.S. investors can look beyond our borders. The article lists a wide range of countries with booming IPO activity. Over the last decade, new listings rose 28% in Tokyo, 92% in Hong Kong and 65% in Sydney, so the IPO non-boom appears to be a uniquely American issue.