According to the International Monetary Fund (IMF) "World Economic Outlook," China's output will surpass that of the United States in 2016 - only five years from now. But don't worry. The IMF calculation is based on "purchasing power parity" (PPP), which does not reflect real money. It relies on projecting China's stellar growth rates five years into the future. And it relies on Chinese official statistics, which are more than a little questionable. (In fact, after the media storm that resulted, the IMF apparently even soft-pedaled its prediction that China would leapfrog the United States in just five years; in a subsequent interview, an IMF spokesman reportedly said that, by non-PPP measures, the U.S. economy "will still be 70% larger by 2016." A recent World Bank forecast concluded that China could overtake the United States by 2030.) This prediction - and the attention it continues to draw - serves a useful purpose, particularly if it's given the scrutiny that it deserves. For global investors with China-based holdings, it reminds us of that country's long-term potential - and the fact that such potential is always tempered by near-term risk. For the rest of us, it reminds us that China's ascendance is inevitable - in fact, is already happening - and will be with us for a long time, even if that Asian giant isn't immediately going to overwhelm the rest of the world. And for our elected leaders in Washington, the IMF report - false alarm or not - should serve as a wakeup call to attack and address the many problems that threaten this country's global leadership.
A month ago, Zero Hedge first reported that Bill Gross had taken the stunning decision to bring his Treasury exposure from 12% to 0%: a move which many interpreted as just business, and not personal: after all Pimco had previously telegraphed its disgust with US paper, and was merely mitigating its exposure. This time, in another Zero Hedge first, we discover that it is no longer business for Bill - it has now become personal (and with an attendant cost of carry). In March, Pimco's flagship Total Return Fund (TRF) has now taken an active short position in US government debt: -3% on a Market Value basis (or $7.1 billion), and a whopping -18% on a Duration Weighted Exposure basis. And confirming just what PIMCO thinks of US-related paper is the fact that the world's largest "bond" fund now has cash, at a stunning $73 billion, or 31% of all assets, as its largest asset class on both a relative and absolute basis.
There have been three main drivers to the secular bull market in commodities, be it copper, crude oil, or corn. First, a chronic lack of investment throughout the bear markets of the 1980s and 1990s has led to a shortage of supply. Second, this shortage of supply has come just as eastern Asia, particularly China, is modernising and rebuilding its infrastructure. And, third, our modern fiat system of money and credit makes inflation and speculation inevitable, especially when it is subjected to the insanely loose monetary policies of our central bankers. Generally speaking, most people cite driver number two, China, as the reason for the rise in the price of raw materials – base metals, grains, energy – the commodities that are being consumed voraciously as China's middle class grows. Gold, on the other hand, we are told, is rising mainly because of inflation and fears 'about the system' – driver number three. But what if you took 'driver number two' and applied it to gold? What if the Chinese middle class all wanted gold?
One of the received wisdoms of investing is that you should diversify. Have some equities, some bonds, some gold, some commodities, some real estate, some cash and so on. Then if one sector takes a hit, you're not too badly hurt. The problem with this strategy is that you don't make that much money either. It's rare, even in this era of crazy asset price inflation, that every market will rise together. The way to make serious money is not to diversify, but to intensify. Find the sector that's in a bull market – such as tech stocks in the '90s, or metals now – and then 'get all over it'. But that's also the way to lose everything. If you're not out by the time the party's over, you give back all your gains and wake up with a nasty headache. So what should you do? I have a solution – or a compromise at least. It's called the 'prospect generator' model.
