Washington Post's Paul Blustein: Many View Argentina's Comeback With Skepticism

Many View Argentina's Comeback With Skepticism

Some Financiers and Bondholders Say Offer to Settle Huge Debt Is Far Too Little
By Paul Blustein
Washington Post Staff Writer

Friday, March 4, 2005

BUENOS AIRES -- Tainted for the past three years as a deadbeat debtor and international financial pariah, Argentina is proclaiming itself cleansed.

In late 2001, during bloody riots, the Argentine government defaulted on about $100 billion in debt. The default was the biggest by any nation in history, and it plunged the economy into chaos, with millions falling into poverty and unemployment reaching nearly one-quarter of the workforce. Many Argentines are still struggling to recover from the fallout.

Now, however, Argentine is recovering, and it is seeking to reenter the global financial system after having cast itself out. The implications go well beyond Argentina's borders to the international system's basic workings.

The government is completing a restructuring of its debt in which it offered new securities to hundreds of thousands of bondholders, ranging from Italian widows to New York hedge funds. Officials announced yesterday that bondholders owning 76 percent of the defaulted debt had accepted the deal, worth about 32 cents on each dollar of claims that they held.

"The country is leaving the default behind," a triumphant President Nestor Kirchner told the nation's Congress.

That assertion is subject to challenge by international financiers and investors. Many of them are angry with the take-it-or-leave-it terms of this week's deal, which leaves bondholders with losses about twice as deep as the average settlement reached in previous sovereign defaults such as Russia's and Ecuador's.

Thrown into question in the process are some hoary financial principles. Countries that treat foreign creditors so shabbily are supposed to be doomed to stagnation for years, because investors and lenders presumably will shun nations that show little respect for property rights. But the boom that Argentina is enjoying stands in mocking counterpoint to that tenet.

It is not just that Argentina recorded annual growth of 8.8 percent for the past two years. More significant, companies are investing. According to government figures, business spending on structures, plant and equipment is close to all-time highs as a percentage of national output.

The investors include foreign-based multinational companies such as Volkswagen. Eight months ago, the German automaker decided to spend $200 million on producing a new vehicle model and expanding capacity at its transmission plant in the industrial city of Cordoba.

"You can see just by opening the paper" that foreign firms are expanding in Argentina, said Viktor Klima, the head of Volkswagen's operations here, referring to a news article reporting that General Motors was investing in its plant in the city of Rosario, and another reporting that a company was moving its manufacture of ignitions to Argentina from South Africa.

Other investors are Argentine. Aluar Aluminio Argentino SAIC, a major aluminum producer, is sinking $650 million in a two-year project to increase its capacity by about 44 percent to 400,000 tons a year. Eduardo Elsztain, the country's biggest real estate developer, has just opened a shopping center in Rosario. He has more malls in the works elsewhere in the country and his firm is planning to start construction soon on a $42 million retail-residential-hotel complex bordering a nature preserve near the capital's downtown area. In Elsztain's view, "there has never been a better time to invest in Argentina." As for foreign banks, after shunning Argentina for a while, "now the banks are coming to us," he said.

"It's been tough. We will have restrictions," he said. "But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy."

During the 1990s, Argentina had no worries about obtaining international capital -- and that was how it went astray. With its free-market policies, a fixed exchange rate of $1 per peso and a near-zero inflation rate, the country was the darling of the International Monetary Fund and a magnet for foreign funds. It depended on international bond markets to cover its budget deficits, and Wall Street was happy to oblige. Once foreign financiers realized the country had piled up unsustainable debts, however, they began to pull their money out. The ensuing default also led to a crash of the peso.

Today the government has no need to borrow from abroad because it has been running budget surpluses. That is attributable in part to soaring prices for soybeans, wheat and other commodities, which have fattened the country's export receipts and tax revenue. It is also partly attributable to the government's discipline in keeping a lid on the wages of public-sector employees. With the government treasury full, economic policymakers here can shrug off the threats by foreign money managers to boycott Argentine bonds.

The rules of global finance have by no means been repealed entirely. Argentina is still paying a steep price for its default. More than 40 percent of the population remains below the poverty line, and obtaining long-term credit remains very difficult, if not impossible, for many companies.

Still, many in the financial community are upset over the ease with which Argentina is breaking loose from the constraints that usually hobble bankrupt countries. The research firm CreditSights Ltd. wrote in a recent report to its investor clients: "Debt repudiation with no consequences . . . appears to be the perfect crime that Argentina is about to perpetrate with its debt exchange."

Objections Abroad

During a tour of foreign cities a few weeks ago to explain the offer, Finance Secretary Guillermo Nielsen was greeted by protests by investors. "Thievery," "coercion" and "extortion" are among the epithets that investors have used to describe the 32 cents-on-the-dollar value of the exchange.

In response, Argentine officials said that the deal was the most the country could reasonably afford, and those who rejected it faced the prospect of collecting nothing.

The Argentine stance has triggered a number of lawsuits from bondholders, some of whom have won judgments -- in U.S. courts, among others -- requiring Argentina to pay its obligations in full. But collecting such judgments has so far been impossible. The assets that the Argentine government holds abroad -- embassies, mostly -- are protected from legal attachment under international conventions.

That helps explain why such a high percentage of creditors, worn down after receiving no payment on their bonds for three years, participated in the exchange despite their disgust with the terms. By reducing the outstanding number of bonds in default, the government has cleared the way for a new loan agreement with the IMF, an important consideration because a serious confrontation with the IMF would cost the country billions of dollars in international aid and throw it back into the pariah camp.

All this could have significant ramifications for the international system, by making future crises more likely, some policymakers and economists fear. Because the Argentine restructuring is likely to set a new benchmark for investor losses on loans to governments in Latin America, Asia and other "emerging markets," the deal may make markets more prone to bolt from those areas when the global financial environment turns sour.

Some on Wall Street see an even more dangerous precedent: Won't countries with large debt loads such as Brazil, Turkey or the Philippines look at the Argentine case and wonder whether they should default too? Walter Molano, head of research at BCP Securities LLC in Connecticut, wrote in a Feb. 22 note to clients that, thanks to Argentina's example, "finance ministers across the emerging markets are having second thoughts about making fiscal sacrifices in order to continue servicing their external obligations."

Maybe so, but the idea that Argentina provides a model to follow is hard to square with some of the country's gritty realities.

Street Scavengers

The competition is fierce among the unemployed Argentines who descend on this city's streets at night, sifting through trash bags for recyclable items and castoff appliances.

"Are you working this block?" a woman with a young girl in tow asked a short middle-age man who was squashing a plastic bottle for sale to recyclers. Told that he and his children scavenge in the area every evening, the woman and the girl moved on forlornly in search of unclaimed garbage.

The ranks of these cartoneros (cardboard men) swelled into the tens of thousands after the default. To be sure, most Argentines have not been forced to join them. But the cartoneros' plight is emblematic of the fate that befell the country.

The rebound of the past couple of years has failed to improve the lot of ordinary Argentines to the point that they have recovered all of what they lost. Even for salaried workers who kept their jobs, real earnings -- that is, adjusted for inflation -- are still well below the 2001 level. Compared with the peak level of 1998, real wages are down 20 percent, according to data compiled by IDESA, a private think tank.

The problem stems in large part from the depreciation of the peso. With the Argentine currency now trading at about three to the dollar, instead of the one-for-one exchange rate that prevailed before, many goods tied to the dollar -- real estate, cars, electrical appliances -- are out of reach for many Argentines.

On the plus side, the cheap peso is one of the major factors attracting foreign manufacturers such as Volkswagen, which pays its workers an average of less than $6 an hour, including all fringe benefits -- just about the lowest wage in Volkswagen's operations worldwide, according to Klima.

But the diminution in living standards is all too perceptible to Antonio Delgado, who has worked as a nurse in public hospitals for 20 years and supplements his modest salary by working weekends at a private clinic, earning about 2,600 pesos ($870) a month.

The father of five, Delgado remembers the roaring 1990s fondly. He and his family could afford to feast regularly on the tenderest cuts of steak. He bought a 1992 Peugeot and a 1995, two-door Fiat, and the family flew on vacations to places like Central America. Now meat in the family diet tends to be restricted to stews, the Peugeot is rented to a neighbor for use as a taxi, and for vacations the family bundles into the little Fiat for drives to places in the north and west of Argentina. "I really felt the shock of 2001," Delgado said ruefully.

Generation Disillusioned

The trauma is psychological as well, particularly for Argentines who were entering adulthood when the economy collapsed and have become profoundly unsettled about their futures. Dario Jinchuk, a government scientist, cited the example of his son, who stopped pursuing a degree in electrical engineering to study for a job as a chef because he couldn't see any engineering prospects. "A whole generation has become that way -- frustrated," said Jinchuk, who himself is seeking work abroad.

In view of such evidence, many economists scoff at claims that Argentina's default sets a worrisome precedent.

The country suffered "massive social and economic pain with poverty and unemployment rates through the roof," said Nouriel Roubini, a professor at New York University. "And all this would mean that default is costless and that other countries will rush to default like Argentina did? Utter nonsense."

To generate the growth required to reduce poverty significantly, Argentina needs a lot of investment. For that reason, some of the most militant bondholders maintain that the government must eventually offer them a better deal to clear up the uncertainty that lawsuits inevitably create.

But in a move aimed at dashing such hopes, the Argentine Congress enacted a law last month prohibiting the government from paying a penny more. "We were very happy for this law to be passed," said Roberto Lavagna, the economy minister, who clearly sees little downside to such pugnacity.

"When I hear people say, 'Argentina will be isolated,' " Lavagna said, "I have to say the evidence is different."

Special correspondents Brian Byrnes and Mariano Melamed contributed to this report.
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Prudent Investor Comments

With Argentina succesfully dodging a comeuppance from the international financial community for its humungous debt default, the possibilty is that the Argentine model could be a precedent for any debt-laden emerging countries to go on a default. A case of Moral hazard?

Financial Times:WTO appeal judges declare US cotton subsidies illegal

WTO appeal judges declare US cotton subsidies illegal
By Frances Williams in Geneva
Financial Times

World Trade Organisation appeal judges yesterday upheld a ruling declaring illegal billions of dollars in subsidies to US cotton farmers.

Trade experts and development campaigners said the decision was likely to intensify pressure on the US and the European Union to cut farm subsidies in the current round of global trade talks, a central demand of developing nations.

A WTO panel in September backed a complaint by Brazil that US cotton subsidies violated fair trade rules by depressing world prices and breaching WTO subsidy limits.

The verdict marks a moral victory for poor African cotton producing countries, which blame US subsidies for destroying the livelihoods of millions of farmers in west and central Africa.

It could also pave the way for legal challenges to subsidies on other US products, such as soyabeans, rice, oilseeds and grains. Brazilian soyabean producers are already studying a possible complaint. A panel verdict condemning EU sugar subsidies, in a case brought by Brazil, Thailand and Australia, is currently under appeal.

Washington, expressing disappointment with the judgment, made clear it had no intention of quickly withdrawing the offending subsidies. "We continue to believe that negotiation, not litigation, is the most effective way to address distortions in agriculture," Richard Mills, spokesman for the US trade representative's office, said.

"We will study the report carefully and work closely with Congress and our farm community on our next steps."

However, Oxfam, the UK-based charity, said African farmers could not wait for the conclusion and implementation of a final WTO farm trade agreement. Noting that cotton prices had again fallen after a brief recovery last year, it estimated that African producers were losing more than $400m (€305m, £210m) a year because of distorted cotton markets.

The group called for speedy action by the US to dismantle cotton subsidies, including "substantial reform" before the WTO's ministerial meeting in Hong Kong in December.

To comply with yesterday's ruling, Washington will have to slash the more than $3bn a year it pays its 25,000 cotton farmers, and act swiftly to axe its costly export credit programme for cotton and certain other commodities that the WTO has judged an illegal export subsidy. Otherwise Brazil may be authorised to retaliate with sanctions against US goods.

***
Prudent Investor comments...

Government intervention has massively distorted the demand-supply equilibrium in favor of developed countries. With this WTO decision and its successful implementation to abolish subsidies, we can expect global prices of commodities to smoothen out and reflect its underlying economics. The Philippines too may be expected to benefit from these global market reforms.

Financial Times Editorial: A bond market feeding frenzy

A bond market feeding frenzy
Published: March 5 2005 02:00 | Last updated: March 5 2005 02:00
Financial Times Editorial

This is a great time to issue bonds. Over the past couple of weeks, investors have been falling over themselves to snap up new offerings, whether they be long dated or short term, high yield or sovereign.

Beneficiaries of this feeding frenzy have included the French government, which became the first from the Group of Seven leading industrialised countries to issue a 50-year bond. The issue, which will run for 20 years longer than any previous French government bond in modern times, was increased to €6bn (£4.1bn), having attracted orders for more than three times that amount. In what must count as a triumph of hope over experience for anyone with the slightest recollection of how inflation can suddenly take hold, it was priced to yield just 4.21 per cent a year.

Greece, still fresh in the memory for credit-rating downgrades and for having entered the eurozone on the basis of dodgy economic statistics, was able this week to bump up to €5bn the size of its first ever 30-year bond.

In the US, Centex, a US housebuilder, sold $1bn of asset-backed paper and was rewarded with best ever prices. The tranche maturing after one year yielded a record low of seven basis points, or seven-hundredths of 1 per cent, over the one-month London Interbank Offered Rate (Libor).

The yield spread, or premium over government bonds, of emerging market debt has shrunk dramatically. That of many corporate bonds has fallen to levels last seen in 1998, just before the collapse of Long-Term Capital Management, a hedge fund, plunged the world into a big financial crisis.

Bond yields have been falling while the US Federal Reserve and other central banks, such as the Bank of England, have been raising their short-term rates. It is difficult to explain the falling yields, which have brought real yields after adjustment for inflation to unusually low levels, by developments in the global economy. Despite high and recently rising oil prices, world economic activity is expanding at a reasonable pace.

It is little wonder that Alan Greenspan, Fed chairman, spoke last month of a bond market "conundrum". One could go further and argue that bond markets are falling prey to irrational exuberance similar to that seen in equity markets before the dotcom bust.

If so, one unpalatable conclusion is that we are living through a bond market bubble. Indeed, the frothiness of bond markets may be just one more symptom of an ongoing asset-price bubble that has already affected housing in the UK, the US, Australia and the more vibrant parts of the eurozone such as Spain. A common factor behind the asset-price inflation is the strong growth of liquidity produced by the central banks of the US, Japan and Europe in recent years.

It is a world in which psychology and perceptions can change with lightning speed. It can be very rewarding for the professionals in investment banks and hedge funds that choose to ride this tiger. They should be left to get on with it, provided they are equally equipped to pay for the risks taken.

But what of the private investor? The prevailing environment, with low inflation and low returns on conventional investments, is fraught with hazard. The unwary, seeking returns that would have been modest until a few years ago, may underestimate the risks involved. Like equities, bonds and bond-related investments can go down as well as up. In today's market, the watchwords must be Caveat Investor.

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Prudent Investor comments:

Debts, debts and more debts contribute to the fast exploding global liquidity. With bond prices rallying in the face of interest rate hikes and narrowing spreads, investors are fostering asset bubbles globally in the chase of higher returns. This poses as an accident waiting to happen.

Resource Investor: Philippines Anti-Mining Trash Talking Reverberates

Philippines Anti-Mining Trash Talking Reverberates
By Derek Moscato
03 Mar 2005 at 02:10 AM EST

VANCOUVER (ResourceInvestor.com) -- The February saber rattling in the Philippines, spearheaded by political radicals and environmental activists in that country and in some cases aimed to scare off foreign mining companies, continues to cause aftershocks overseas. The trash-talk is disconcerting for industry supporters in the West, as well as the rest of Asia, not merely because it threatens to roll back a good deal of progress to date, but more so because of the violent overtones.

"The worst foreign mining companies who plunder and ravage the environment and our mineral resources, as well as their military and police protectors, will be punished," said Gregorio Rosal, spokesperson for the country’s Communist party, who went on to say that his party’s military wing "can carry out a wide range of measures to disable the operations of the most destructive mining companies."

Fear and Loathing in British Columbia

The development was worthy of recent heavy coverage in Vancouver ethnic media circles. "Filipino rebels warn they will attack Canadian mining firms" were the words splashed across the front page of the Asian Pacific Post, which caters to the city’s substantial East Asian and South Asian communities.

The story went on to say that some of the supporters of the Communist Party of the Philippines and its anti-mining stance were overseas workers living in Vancouver.

It’s likely that more than one Howe Street promoter on the quest for a Starbucks fix did a doubletake when confronted with the headline and ensuing published threats.

The newspaper went on to explain that "as the rhetoric and threats of attacks intensify, students and priests from the Philippines’ powerful Catholic community have joined forces to launch a campaign to gather one million signatures nationwide to oppose the operation of transnational mining companies in the country."

Rhetoric Versus Reality?

All of this flies in the face of the good news coming out of the country’s mining industry, including the Supreme Court’s upholding of the legality of the 1995 Philippone Mining Act, which allows for 100% ownership of large mining projects.

Many junior mining concerns have been counting on increased economic and political stability to help bring investor interest back to the country.

Alberta-based miner Mindoro Resources [MIO.V], which is focused on gold-copper projects in the country, is a case in point. In a recent interview with Resource Investor Mindoro VP Penny Gould argued that changes like that have helped prop the local industry up. "We've been there since 1996, and we've seen many changes, particularly in the past few years," she said.

Shares of Mindoro have actually traded higher since the onset of verbal hostilities. Shares, which traded at roughly $C0.20 in January, have traded in the $0.30 to $0.40 range since mid-February. Gould did not return a request for comment on the most recent developments, however.

And shares of TVI Pacific [TVI.TO], another Alberta concern which has significant stakes in the Philippines by way of its projects at Canatuan and Rapu Rapu, have also been unfazed. The Toronto-listed stock, which traded as low as C$0.09 earlier this year, now trades at about $0.13.

The company is feeling heat from the London-based Peoples Indigenous Link and local church-backed environmentalists about its program at Canatuan.

Earlier in February, company president Clifford James had a private meeting with Philippines president Gloria Arroyo, in conjunction with the country’s Mining 2005 "Open for Business" Conference held in Manila.

According to TVI, she assured the company at the time "that she and her government would take all measures they could to support TVI and to resolve any problems encountered with local administrations and civil society."

TVI did not return messages from Resource Investor as of publication time.

The Media Wildcard

But in addition to the student-activist/Catholic/Communist coalition, the country’s outspoken media has sometimes positioned itself against the government’s pro-industry position.

"When nothing else seems to be working for the Philippine economy, the government is now promoting the country as the new El Dorado, with vast mineral wealth that some claim is enough to pay for all the country’s debts," writes Roderick T. Dela Cruz for the country’s Today newspaper. "Unfortunately, mining remains a troublesome area full of legal traps, which could ignite social upheavals that would only exacerbate the poverty problem."

The downer commentary is complemented by some unflattering international reports.

A recently released business survey entitled Moving Toward a Better Investment Climate and conducted jointly by Asian Development Bank and World Bank cites serious economic challenges for the country including weak macroeconomic fundamentals, corruption, infrastructure shortcomings, and excessive bureaucracy.

And a 2003 survey of 158 mining firms conducted by the Vancouver-based economic think tank The Fraser Institute found that the Philippines ranked only 40th among 47 countries in terms of overall investment attractiveness.

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Prudent Investor's Comment:

For the commies and mining detractors: they are immersed with absolute myopia and damaged culture. Eternal perdition awaits the country if these regressive thinkers prevail....B@#$%S!!!

Look around....Latin America, Australia, Canada, South Africa, Thailand, Indonesia and Malaysia (even India is now in the process of opening its mining industry to foreigners) or even some African states...are survived by extractives....are they inundated with environmental problems, plagued by social upheaveals? In Africa the political and social tumult arises not from extractives but administrative mismanagement and corruption. To say that these would be disadvantageous to the country is one HUGE pile of DUNG!!!

Martin Spring's On Target: Marc Faber’s Views on Investing Now

Lifted from Martin Spring's latest On Target newsletter, Mr. Springs features an interview with marquee contrarian market savant Dr. Marc Faber...

Marc Faber’s Views on Investing Now

I took time off from holidaying in Northern Thailand for the privilege of a two-hour discussion with Marc Faber, the well-known commentator and editor of The Gloom, Boom & Doom Report, at his Chiang Mai home. Here’s how it went…

The Dollar

Spring: Do you expect the greenback to continue losing value?

Faber: Over the next three to six months there is likely to be a dollar rally, ahead of news of favourable events such as an improvement in the US current account. Although we could see the dollar go on to make a new low against the euro, it’s possible that the low of the current cycle has already occurred -- at the turn of the year.

Over the longer term, all paper money will lose purchasing power, but Asian currencies less so than the US dollar.

Inflation

Spring: Almost all commentators argue that central banks’ money supply creation must eventually produce renewed inflation, which is why they are consistently negative about bonds. Is that realistic?

Globally, the imbalance between supply and demand puts downward pressure on prices, and that seems set to continue, given the vast new low-cost manufacturing capacity being created in China. In real terms, interest rates remain low, suggesting that central banks aren’t worried about inflation. What is your view?

Faber: There is already plenty of inflation! You can see it in the prices of things like property, insurance, education, a lot of which doesn’t show up in the official consumer price indexes, where governments manipulate figures to keep them down.

Because of the highly leveraged financial markets, central banks will always accept inflation as the price of warding off any recession threat. The moment the banks see economic slowdown, they will stop their current tightening and revert to “printing” money.

You can be sure that in ten years’ time just about everything will cost more than it does now. The integration into the global economy of 3 billion people emerging from communism and socialism is producing demand pushing up the prices of many resources. Oil, for example, is four times more expensive than it was in 1998.

Although there will always be some pockets of falling prices, I don’t believe the world will see across-the-board deflation. Long bonds such as 30-year Treasuries may continue to rally for a while, but I don’t believe interest rates can stay this low, because they will have to react to higher visible inflation.

Within the next 20 years we could easily see annual inflation in the US rise as high as 10 per cent – accompanied, of course, by a depreciating dollar.

US interest rates

Spring: Currently the financial markets are positioned to assume that the Fed will continue pushing up interest rates till its lending rate reaches about 5 per cent. Is that realistic, given the dangerous leveraging involved in the carry trade, and the Fed’s history of reacting nervously to any perceived threat by flooding the system with credit?

Faber: The Fed isn’t particularly smart, as it showed by creating the asset bubble.

Because the Fed currently – and erroneously – believes the US economy is fundamentally sound, it will continue to push up rates. But not to 5 per cent. Perhaps to, say, 3½ per cent. That would be enough to cool down the economy considerably, without putting too much strain on the debt markets, particularly housing finance.

For the next few months bonds will continue to perform; but there are large downside risks in bonds. Rising short-term rates are good for bonds… and for the greenback. Dollar-denominated zero-coupon bonds are a buy. When policy changes, so will the dollar… and bonds.

There is a stronger case for owning euro-denominated long bonds. We’re not likely to see much inflation in Europe, and in some parts, even deflation.

The problem with investment markets now is that there is no compelling buy – not stocks, not bonds, not real estate. It’s very hard to find anything with an upside potential of 500 per cent and a downside risk no more than 20 per cent. There’s so much money slushing around and being used by hedge funds, the trading departments of banks and other big speculators to chase up the prices of momentum plays.

China

Spring: Will the Chinese economy slow down, as is generally expected? Longer-term, will it continue to deliver the extraordinary growth rates we’ve seen in recent decades?

Faber: We have already seen a sharp slowdown in sectors such as automobiles, electricity and real estate. I am leaning towards the view that we’re going to see a hard landing in China. The capital investment binge has produced such overcapacities – in steel, for example, capacity has doubled over the past three years.

If interest rates continue to rise in the US, that will dampen Chinese export growth. The effects will be transmitted directly into the Chinese economy because of the yuan’s fixed link to the dollar.

However, industrial production continues to expand strongly. Even if economic growth continues at say 4 per cent, that will feel like recession.

Longer-term, say over the next ten years, I expect annual growth to continue to average between 6 and 8 per cent.

China is at the heart of an Asian economic bloc that is already the world’s largest. Its industrial production is already 50 per cent higher than the US or Europe. There are already 330 million mobile phone subscribers in China! There are growing populations, and fast-growing middle classes.

Investing in Asia

Spring: How can international investors profit from the coming economic growth in Asia? Currently dividend yields look good, dividend growth has been good, operational cashflows are good, and balance sheets have been strengthened considerably, with deleveraging.

Faber. Unfortunately there is no correlation between economic growth and share prices. The environment for investors may not be all that good.

However, Asian currencies are no longer vulnerable as they were in 1997. Assets are undervalued relative to those of the US and Europe.

Even if there is a world recession, that won’t necessarily be bad for Asian manufacturers. A slump drives companies to look for cheaper sources of supply. It could lead to Asian exports increasing rather than decreasing.

Some argue that the recent strong rise in the Indian stock market has been overdone, but in dollar terms Indian equities are no higher than they were in 1994, and the political and economic environment is now much more attractive than it was then.

I am not keen on buying Indian shares now, but in five years’ time they will be higher. The market is currently trading on an earnings multiple of 13 times, which is OK.

In January we saw an interesting development in Asian stock markets, when they decoupled from the rest of the world’s. The reason is favourable macroeconomic conditions. Real estate and equity valuations are low to reasonable. Asia’s sensitivity to the risk of faltering export markets is probably over-estimated.

Look to the importance of improving domestic demand. In China we are seeing a deflationary boom as goods become more affordable, as happened in the US in the 19th century.

In the short run, a “hard landing” could see some sales of Asian stocks by international investors. There is some froth in Asia’s older stock markets.

There’s a downside risk of say 10 to 20 per cent in Thailand, for example. But there are always opportunities to be found. In Thailand, in companies oriented towards domestic markets, or food product exporters. A market earnings multiple of 12 times isn’t unreasonable in a world of inflated asset prices.

There is some potential in Singapore companies offering 5 per cent dividend yields. Malaysia offers a well-educated population, stability, and valuations that aren’t overstretched.

As you know, I argued in my book “Tomorrow’s Gold” that one of the best ways to invest in Asia’s growth is through commodities.

In the short run rising commodity prices could be painful, but as additional output is encouraged, we could see oil fall back to perhaps $35 a barrel, and industrial metals retrench perhaps 30 to 40 per cent. At this stage opportunities look best in the soft commodities such as corn, wheat and soya beans.

Political risks

Spring: Are investors ignoring the political risks, with China’s increasing economic power producing greater military power, rising tension with Japan, and intensifying international competition for natural resources?

Faber: Political tensions are not likely to lead to military confrontation.

The Chinese are being very smart with their “soft colonization” of the world through investment and building trade relationships – which will be followed by migration of Chinese businesses and people to other countries.

South America, and especially Africa, are a perfect economic fit with China. They are areas with huge resources, marked by poor government and corruption, uneducated populations, and no manufacturing bases outside South Africa that could compete with China. They are big potential sources of resources such as oil, and foodstuffs.

Japan

Spring: Japan seems condemned to low economic growth, with a structural savings surplus and an aging population. Yet it could be the major beneficiary of China’s growth because of its growing markets and investments there. What do you think?

Faber: Although Japan has had low growth for 13 years, don’t forget that the typical household has enjoyed appreciating wealth. Houses, other assets, consumer goods, are much cheaper. Only bonds are more expensive.

Even with economic growth of only 1 per cent, there is a very favourable environment for financial assets.

Companies have moved much of their manufacturing to China and other low-cost parts of Asia. In time, they will earn the bulk of their profits outside Japan.

Stocks are now relatively appealing. I would rather invest in a country with a good savings rate than in one making no savings at all!

The Japanese stock market capitalization has declined from 50 per cent of the world’s at its peak in 1989 to around 9 per cent now. That makes Japanese stocks attractive, and I expect them to outperform the US over the next five years.

Gold

Spring: The recovery in the gold price in recent years has largely been a dollar phenomenon – I have described the yellow metal, at this stage, as being little more than an anti-dollar play. Do you agree?

Faber: In a world of inflated assets, gold is cheap relative to oil, the S&P500 and other assets. And with interest rates so low, the opportunity cost of holding gold is low. We are at the beginning of a long-term bull market in gold – and silver.

Europe

Spring: Given its over-regulated, over-taxed environment, with public opposition to reforms and increasing political stresses within the European Union, how can Europe hope to compete with Asia and the US?

Faber: The incorporation of the Central and East European nations into the Union will discipline the Western Europeans and force them to change. They’ll either have to work more or work for less pay, or they’ll lose jobs to the new member-states.

The living standards of Europeans are going to decline relative to those of Asians. A worker in Europe won’t be able to continue earning 20 times as much as one in Asia; an engineer five times as much as one in India.

The multinationals like Nestlé will continue to do OK, but worldwide they will face intensifying competition from the emerging “national champions” of China and India, as they have done in the past from those of Japan.

We are likely to see increasing polarization in the world between the rich and the middle classes – the latter have been the prime beneficiaries of asset inflation, especially in real estate. A newly rich class in Asia and Russia will be buying their houses in Belgravia, so there will be pockets of wealth in Europe.

You will also see some movement of wealthier people from Europe to Asia. Here in Northern Thailand you can live for just 20 per cent of what it costs in Europe.

Channel News Asia: China spends US$195 billion to maintain currency peg

China spends US$195 billion to maintain currency peg
Channel News Asia

BEIJING : China's central bank spent 1.61 trillion yuan (195 billion dollars) buying foreign currency last year to maintain the yuan's peg with the dollar, a rise of 40 percent over 2003.

The People's Bank of China also drained 669 billion yuan from the banking system via open market operations last year, more than double the 282 billion yuan used in 2003, Xinhua news agency said citing a central bank report.

"The central bank faces comparatively large pressure in the management of money flow and currency control," it said.

China keeps its currency pegged to the US unit in a very narrow trading bank of about 8.28 yuan, a level which trading partners, especially the United States, say gives Chinese exports an unfair advantage.

The government is not only under political pressure to let its currency appreciate but the central bank is struggling to mop up the extra cash in the system flowing in on speculative bets that it will free up the peg.

China has resisted foreign pressure to loosen the yuan peg but has promised that it will move over time towards a more flexible exchange rate regime.

Balloning trade surpluses and years of foreign investment have flooded the financial system with cash and market players say the central bank has been virtually the only buyer of surplus hard currency such as the dollar.

As a result, China's foreign reserves in 2004 soared to a record 609.9 billion dollars from 403.3 billion dollars in 2003, with the increase equal to the total intervention amount.

Meanwhile, China's 60 billion dollar current account surplus, up 25 billion dollars from 2003, and 61 billion dollars of foreign direct investment (FDI), were additional large sources of foreign exchange, ING economist Tim Condon said in a note.

This still leaves 74 billion dollars (614 billion yuan) of non-FDI capital flows, coincidentally roughly the same amount as the central bank drained from the system through its open market operations.

"This is the monetary management issue that we believe will motivate the authorities to reform their exchange rate regime by introducing greater two-way risk some time in the second quarter of 2005," Condon said.

In attempt to ease pressure on the currency, China will cut its growing balance of payments surplus by permitting more foreign currency to leave the country, state media reported earlier this week. – AFP

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Prudent Investor says

While the going gets good...China has been able to finance its currency peg with its large surpluses, plump foreign reserves and 'turning on the crank'...until when?

Bloomberg: Oil Surges, Gasoline Rises to Record as U.S. Refinery Use Falls

Oil Surges, Gasoline Rises to Record as U.S. Refinery Use Falls

March 2 (Bloomberg) -- Crude oil rose above $53 a barrel for the first time in four months and gasoline surged to an all-time high on concern that oil production and refining capacity are not keeping up with rising demand.

Refineries used 89.3 percent of their capacity in the week ended Feb. 25, the lowest since October when companies were performing repairs after a hurricane hit the Gulf of Mexico, the Energy Department report showed. Hedge-fund managers and other large speculators purchased contracts after the report was released at 10:30 a.m. today, bidding prices higher.

``There has been a string of refinery disruptions when we need all of our refineries to be up and running,'' said John Kilduff, senior vice president of energy risk management with Fimat USA in New York. ``There is a speculative element as well. There are too many dollars chasing too few barrels of oil.''

Crude oil for April delivery gained $1.37, or 2.7 percent, to $53.05 a barrel on the New York Mercantile Exchange, the highest close since Oct. 26. Prices are up 45 percent from a year ago.

Gasoline for April delivery rose 8.11 cents, or 5.8 percent, to $1.4838 a gallon in New York, the highest close since the contract began trading in 1984. Prices are 30 percent higher than a year ago.

The average U.S. retail price for regular gasoline rose 2.3 cents to $1.928 a gallon in the week ended Feb. 28, the Energy department reported on Feb. 28. The price is up 12 percent from $1.717 a gallon a year ago.

U.S. stocks declined on concern that the rising energy prices will hurt company profits. The Dow Jones Industrial Average fell 18.03, or 0.2 percent, to 10,811.97. The Standard & Poor's 500 Index was down 0.33 at 1210.08.

Oil company stocks advanced with oil prices. Exxon Mobil Corp., the world's biggest publicly traded oil company, rose 58 cents, or 0.9 percent, to $62.68 in New York Stock Exchange composite trading.

Refinery Disruptions

Lyondell-Citgo Refining LP, a joint venture between Lyondell Chemical Co. and Citgo Petroleum Corp., shut a unit at its Houston crude-oil refinery yesterday, state regulators said.

Lyondell Chemical spokesman David Harpole declined to comment on the report or the refinery's operations. The refinery can process 265,000 barrels of crude oil a day.

A fire on Feb. 26 at BP Plc's Whiting, Indiana, refinery didn't reduce crude-oil processing or fuel production at the company's second-largest plant, a spokesman said.

U.S. Inventories

U.S. crude-oil inventories gained 2.4 million barrels to 299.4 million, the highest since July. The median forecast of 12 analysts surveyed by Bloomberg was for a rise of 1 million barrels. Gasoline stockpiles climbed 973,000 barrels to 224.5 million. Analysts expected an increase of 1.1 million barrels.

Inventories of distillate fuel, a category that includes heating oil and diesel, fell 1.7 million barrels to 110 million, the report showed. Analysts expected a 1.2 million barrel decline.

``The crude number was slightly bigger than expected while the gasoline and distillate numbers were right on the money,'' said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York. ``The most important thing about the numbers is that they are out of the way, which is allowing the funds to come in and buy crude with both hands.''

Speculators, including investment funds, last week had their biggest bet on higher oil prices in eight months, according to the Commodity Futures Trading Commission. So-called net-longs in New York soared by 22,548 contracts to 54,176 in the week ended Feb. 22, the commission reported. The net-long positions peaked at 82,451 contracts in March 2004.

Funds

Increased fund buying may boost commodity prices, Kevin Norrish, head of commodities research at Barclays Capital in London, said in a report yesterday. Funds are reaping the higher returns of investing in commodities. The Reuters-CRB index rose 11 percent last year compared with 9 percent for the Standard & Poor's 500 Index. Oil in New York gained 34 percent last year.

Prearranged agreements to buy or sell futures, known as stops, were clustered at $52.50 a barrel, Silliere said. We are now ``looking at the record $55.67 and the funds will then aim at $60,'' he said.

Oil surged to a record $55.67 a barrel in New York on Oct. 25 because of high global demand, particularly from China, and the threat of disruptions to oil shipments from Iraq, Russia and Nigeria.

Restraining Demand

``Oil prices will likely stay in the $40- to $50-per-barrel range and may have to move higher still to restrain demand,'' said James Buckee, chief executive of Calgary-based Talisman Energy Inc. The company produces oil and gas in North America, Asia, the U.K. and Middle East.

Prices surged in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.71 in today's dollars.

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, is concerned that rising inventories will lead to a decline in prices during the second quarter of the year. OPEC will discuss production targets at a meeting in Isfahan, Iran, on March 16.

The 11-member group's president, Sheikh Ahmad Fahd al-Ahmad al-Sabah, who is also the Kuwaiti oil minister, said in January OPEC may be willing to let global inventories get large enough to cover 56 days of demand before it cuts supplies. Al-Sabah said inventories covered 52 days of demand on Jan. 30.

``The higher-than-expected gain in crude oil inventories ensures that OPEC won't be increasing production when they meet,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago.

In London, the April Brent crude-oil futures contract rose $1.11, or 2.2 percent, to $51.22 a barrel on the International Petroleum Exchange, the highest close since Oct. 26.

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Prudent Investor says...

Notice that crude oil has been climbing in spite of increased stockpiles or supplies. On the contrary, there has been an intensive build up of net long positions. Put differently the market sees oil prices climbing either through speculations "too many money chasing oil prices" or anticipations that current supplies will not sufficient to meet demand. For me, this is just part of the unfolding rendition of the 5 year old trend, which is unlikely to be broken given current conditions.

Yahoo News: Iran, Russia sign key nuclear fuel deal

Iran, Russia sign key nuclear fuel deal

February 27
By Paul Hughes

TEHRAN (Reuters) - Russia and Iran (news - web sites) signed a nuclear fuel supply deal long opposed by Washington on Sunday which will pave the way for the Islamic state to start up its first atomic power plant next year, state media reported.

The agreement, signed by the two countries' nuclear energy chiefs at the Bushehr atomic reactor in southern Iran, came as Tehran faced heightened pressure from the United States, which accuses it of secretly developing nuclear weapons.

Iran denies the charge and has received strong backing from Moscow, which is keen to extend its commercial interest in Iran's drive to produce electricity from nuclear reactors.

"This is a very important incident in the ties between the two countries and in the near future a number of Russian experts will be sent to Bushehr to equip the power station," Iranian state television quoted Alexander Rumyantsev, head of Russia's Federal Atomic Energy Agency, as saying.

A key part of the agreement is aimed at addressing U.S. concerns, obliging Tehran to repatriate all spent nuclear fuel to Russia.

Moscow hopes this will allay U.S. worries that Tehran may use the spent fuel, which could be reprocessed to make bomb-grade material, to develop arms.

FIRST BATCH OF FUEL READY TO GO

Details on the timing for the supply and repatriation of fuel were not disclosed. Iranian officials said on Saturday disagreements over when Russia would send the first shipment of fuel to Iran had delayed the deal's signing by 24 hours.

Rumyantsev said the first batch of enriched uranium for Bushehr, which is surrounded by anti-aircraft defenses against possible attack, was ready to go.

Gholamreza Aghazdeh, head of Iran's Atomic Energy Organization, said Bushehr would be ready to go on-line some time after March 2006.

"Based on the agreement, the installation and assembly of the power station's equipment will finish in the next 10 months and six months after that ... the official launching of the power station starts," television quoted him as saying.

When operational Bushehr will generate 1,000 MW of electricity. Initiated before Iran's 1979 Islamic revolution and badly damaged during the 1980-88 Iran-Iraq (news - web sites) war, the project was later revived with Russian help in the late 1980s and has cost about $800 million.

Iran has announced plans to build several more power plants, generating 7,000 MW from nuclear power by 2021. Russia hopes to claim a significant share of this new business.

The Bushehr power station has aroused less concern in the West than Iran's plans to produce its own nuclear fuel for future reactors using uranium mined, processed and enriched inside the country.

The European Union (news - web sites) and United States want Iran to scrap its uranium enrichment plans entirely. Iran has refused but has suspended enrichment while it tries to reach a negotiated settlement with the European Union.

(Additional reporting by Sonia Oxley in Moscow)

India Times: Commodities trading spreads into 400 cities

Commodities trading spreads into 400 cities

TIMES NEWS NETWORK[ WEDNESDAY, FEBRUARY 23, 2005 12:23:37 AM]

Equities could be the obvious road to wealth, but commodities are now beginning to capture the punter’s imagination too. From zero volumes a year ago, the combined trading volume achieved on the national commodity exchange platform has reached Rs 260,659 crore in ‘04.

Futures trading has landed in over 400 cities in India, covering 1,000 brokers through 5,000 terminals.

The budget can give it a further boost by straightening regulations, promising legal changes, and allowing institutional investors to buy commodity contracts (which are considered securities by the Securities Contract Regulation Act).

How big is the market? Already, the futures market for gold and silver is about four times and 40 times, that of spot markets respectively. With imports of over 700 tonnes of gold every year and around 10,000-15,000 tonnes of gold stocked in the country, the futures market is definitely raring to grow. In other countries like America, futures volumes are as high as 72.9 and 55 (‘01) times the gold and silver spot markets respectively.

India is in a hurry. More than a dozen Indian banks have already taken up stake in various exchanges. Jignesh Shah, MD of MCX, which is promoted by a consortium of 10 banks says, “banks and other financial institutions like mutual funds should be allowed to participate in trading.”

Mutual fund participation on commodity exchanges is also likely, considering the regulators are open to the idea. NCDEX CEO, P Ravikumar says mutual funds will be able to diversify investors’ portfolios and ensure higher returns at limited risks.

“The biggest beneficiary of derivatives trading could be the agricultural community”, says Kailash Gupta, MD, NCME — India’s first national commodity exchange. The government support price, quota system and intervention in procurement at administered prices has distorted the market, he says.

Exchanges agree that a major reform in this segment would be the introduction of options and index-based trading, which is currently not permitted by the Forward Contract Regulation Act.

Already the FMC has recommended a modification of section 19 of the FCRA Act to allow options. FMC is also favouring the introduction of exotic commodities like weather and emissions.

Brokers, who are largely responsible for getting liquidity, have sought a modification in section 194-H of the Income Tax Act, which stipulates commission and brokerage payments. Exchanges like the MCX, argue that commodities futures trading should be viewed at par with the securities business, so that the commodities brokers are not discriminated against.

The treatment of “speculative income” is another contentious issue. Exchanges say the government must recognise commodities trading as a “line of business” and not as pure speculation, as considered under section 43(5) of the Income Tax Act.

Industry expectation is that the negotiability status of the warehouse receipt could also find a mention in the budget. A proper warehousing mechanism supported by a receipt system could boost the trade finance system.

The industry also demands rationalisation of the stamp duty. Though it is a state subject, the fact remains that due to the applicability of different stamp duties, the cost of transactions varies tremendously.

The much talked-about VAT will also have an impact on the sector, says NCDEX chief economist Madan Sabanabis. The introduction of VAT would help clear quite a few issues relating to sales tax.

As often said, futures are a zero sum game. So there have to be losers. Regional exchanges have taken a backseat, despite having domain knowledge. Rapidly decaying volumes, dwindling membership and lack of professionalism are creeping into the system.

For example, the once-flourishing East India Jute and Hessian Exchange is a shadow of its former glory, with little liquidity in their Hessian contracts.

All exchanges are unanimous that a strong regulator is the need of the hour.