Getting Straight Data on Trade and FDI for Revealed Comparative Advantage

I recently read the Asia Society's report on Chinese Direct Investment in California and perused the Rhodium Group's China Investment Monitor.  Both products are excellent rundowns of where Chinese investors find the US economy to be most attractive.  Both of these sources got me thinking about the relationship between trade data and FDI in the US.  

Trade data should be easy to compile if sources agree on computation methodologies.  I'll forgo the US Census Bureau's USA Trade because it charges a subscription fee.  The stats at USITA's TradeStats Express are free and meet my needs.  The UN Comtrade Database purports to be a comprehensive source of worldwide merchant trade data but I don't know how reliable it is for developing countries.  

Figuring FDI for any country ought to be straightforward.  After all, you'd expect a single country to report the same data sets to every international organization in which it holds membership.  The difficulty comes when those international organizations change their definitions of FDI and end up with different methods of collection and assessment.  The OECD has good stats on FDI and the IMF has a complex methodology for defining FDI.  The UN Conference on Trade and Development harmonizes the IMF and OECD approaches to measuring FDI.  I looked at the BIS stats page but found nothing obvious for FDI.  

I mention these sources because I want to discover whether trade data determines a revealed comparative advantage (RCA) that will attract more FDI.  The World Bank has a handy-dandy RCA calculator called WITS and UNESCAP has a good RCA definition.  I suspect there is a relationship between a country or region with a high RCA and a high inflow of FDI, presumably because sophisticated multinational investors want to invest in a region that has a disproportionately high share of the world market for a given set of goods.  I can't prove this yet with data, so I'm thinking out loud to signal the start of my research effort.  I plan to use the US as my test case and start with an analysis of my favorite sectors - defense/aerospace, logistics, renewable energy, and natural resources - to see if this relationship holds in my home country.  

Foreign ownership of US Treasury securities has long been a vote of confidence in the US economy.  I want to discover whether the FDI demand for the US's trade RCA justifies this confidence.  Watch this space for the official Alfidi Capital special report, coming whenever I get through the rest of the stuff I have to write about.

Financial Sarcasm Roundup for 08/12/13

If I were a comic book superhero, my superpower just might be sarcasm.  I wouldn't need a disguise at all.

Germany has resigned itself to the likelihood of a new Greek bailout.  Even the stern German psyche has crumbled in the wake of the IMF's pivot away from austerity.  The Davos clique must be clucking with delirious excitement that their fixed-income investments and hedge fund debt arbitrage strategies are going to be preserved in amber.  No worries about hyperinflation for this crowd, no sir-ee.  I'm really going to enjoy watching the euro's hyperinflationary demise wipe these idiots out.  They can beg me to explain to them at Davos why they ended up broke.

Big Data changes everything.  I knew this from attending many conferences here in the Bay Area and now the middlebrow mainstream media feels comfortable introducing the concept to the masses.  The hot careers of the future will require Big Data masters of operations research with Six Sigma certifications.  Former hedge fund managers will be perfectly suited for these jobs once their funds implode.

More Americans are deciding not to be Americans anymore.  The folks whom FATCA has most inconvenienced are precisely the types of sophisticated, worldly job creators the US needs to keep.  Some version of the DREAM Act may negate this outflow by attracting highly educated immigrants, provided they aren't elbowed aside by illiterates grabbing welfare benefits.

I've attended some tech events lately where the participants think the social media train will never lose steam.  They need to read the news covering VC investments showing a collapse in funding for social media startups.  The next big trend in VC will be the funding of real things, especially things that plug into the Internet of Things (IoT).  I'm going to check out some of these tech things tonight.

China's Auditors Flat On Their Backs

My regular readers know that I've been long FXI for quite some time as a long-term bet on China's growth.  That country is still going through the growing pains of an emerging market.  Chinese regulators have good reason to reassure American regulators that they can police their equity markets.  You see, fraud is rampant in China's stock market and knowledgeable non-Chinese investors are getting spooked. 

Some hedge funds have picked up the dropped regulatory ball by warning investors away from questionable Chinese companies.  I hate to admit it, but some hedge funds perform a valuable public service once in a while.  Chinese regulators have extra incentive do their jobs if only to fight the increasing D&O liability resulting from public disclosures of Chinese reverse merger abuse. 

I'm all in favor of more discipline in Chinese capital markets.  More scandals will scare away the liquidity China needs to make its domestic manufacturers attractive to foreign partners.  Remember that China's rare earth metal strategy is designed to attract value-added manufacturing to China's shores.  That goal will be increasingly difficult to reach if Chinese regulators don't work hard to reassure foreign investors. 

Full disclosure:  Long FXI with covered calls.

The Haiku of Finance for 04/16/11

Global finance talk
"Yes, we really must act now"
Nothing will be done

China Prepares Tough Hurdles For Mergers

China wants to have its cake and eat it too.  In a throwback to imperial China's historical insistence that foreigners kowtow and pay tribute, the Middle Kingdom is preparing to exact a new form of tribute from foreign investors:

Foreign investments in military, agriculture, energy and resources, key infrastructure, transport systems, key technology sectors and "important equipment manufacturers" may be subject to reviews, according to a statement published on the central government Internet portal, http://www.gov.cn/.

This isn't merely a response to other countries' barriers to China's strategy of resource acquisitions.  Replace the words "national security" with "rare earth metals" and you'll see the hidden agenda.  China wants to ensure that foreign investment adds to its high-end manufacturing capability without surrendering control of its rare earth metals.  Note the article's comparison to Australia's own review board.  The common theme is that resource-rich countries seek to husband their deposits for the strategic advantage they confer.  Those investments that are permitted will be exclusively to China's advantage. Western corporations will pay a huge premium if they wish to secure their supply chains from China. 

The main driver of strategic conflict in the rest of the 21st Century will be a contest for resources in high-value manufacturing.  The main contestants will be China, India, and the Anglo-West's transnational corporations.  You heard it here first. 

The Limerick of Finance for 11/07/10

Small banks are all going down hard
While big ones turn cash into lard
Chopper Ben is in flight
Giving foreign banks fright
A bank run is not some canard

Possible Gray Swans

Here ya go Hondo:


US vs. China trade war.

Wave of municipal bankruptcies in US.

More supply shocks in Russia (grain or oil) force spikes in commodity prices.

Succession crisis in North Korea puts South Korea and Japan on war footing, sinking both their stock markets and sending CDS on their sovereign debt parabolic. 
 
Pirate activity in Straits of Malacca interrupts one of the world's most important trade lanes, impacting shipping costs, major insurers, oil price, and the Christmas shopping season.
 
Nota bene:  These are thought experiments, or flights of fancy if you will.  None of the events mentioned are guaranteed to occur. 

Debt Commission Urges Americans To Wake The Hell Up

Elected leaders who are unwilling or unable to solve urgent civic problems appoint a commission to give themselves political cover.  The National Commission on Fiscal Responsibility and Reform is one such body, charged with providing politicians with the appropriate cover for unpopular decisions.  This commission on has some inconvenient news for American taxpayers:

The heads of President Barack Obama's national debt commission painted a gloomy picture Sunday as the United States struggles to get its spending under control. 

Republican Alan Simpson and Democrat Erskine Bowles told a meeting of the National Governors Association that everything needs to be considered -- including curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage.

This is the first of what will prove to be several trial balloons designed to alert the American people to the unavoidable decline in their standard of living that they should expect.  Americans have postponed this decline for two decades by whittling away national strengths inherited from our ancestors.  The dollar's status as the world's reserve currency allowed us to borrow from foreigners on the premise that we can print our own payments in an emergency.  That status won't last once China's central bank or one of the Middle Eastern SWFs sends our Treasury department a foreclosure notice.

The mention of the home mortgage tax deduction ought to raise eyebrows among lowbrow Americans but it probably won't.  Americans have come to view home ownership as both a financial entitlement and right of passage into adulthood.  Those of us born a century too late to settle the frontier as pioneers could have our own little suburban homestead, mortgaged to the hilt, as a memento of America's westward progress.  Millions of Americans have incorporated that tax deduction into their household budgets for years as a lifestyle subsidy on the advice of their tax preparers.  Taking it away will do much more than pull the rug out from under consumer spending (remember, that's 70% of GDP).  It will cut a psychic swath through a bourgeoisie that aspired to own a little piece of the frontier in the safe, predictable confines of suburbia. 

The mere suggestion that entitlements like Medicare should be means-tested will provoke further howls form the aging Boomers in what used to be the middle class.  Sixty-somethings might somehow escape the means tests since they're now the largest and most active voting constituency, so Gen X (that's me!!) will get stuck with at least part of the tab.  My contemporaries can forget about upward mobility or discretionary spending.  We will pay for the excesses of our parents. 

The commission's work is far from done.  There will be more trial balloons, more leaks, and a final report that most Americans will blithely ignore.  I'll read it because I'd like to know how far I'll have to dial back my own spending (which isn't much BTW since I value frugality) so Uncle Sam can pay his creditors.  I personally endorse eliminating the mortgage tax deduction and all entitlements like Medicare and Social Security.  That puts me at odds with most Americans for now, but they'll all eventually have to come around anyway.  Americans need to wake the hell up about the bill coming due, but most of them are sound asleep. 

Full disclosure:  Anthony J. Alfidi had to drink a rum and soda cocktail to write this post.

Unhappy News For Tax Day

Income taxes are due to the Internal Revenue Service today.  In that vein, let's do a quick check on the health of the U.S. taxpayer.  Home foreclosures are picking up:

A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report.

I guess lots more former homeowners can forget about taking the mortgage tax deduction on next year's tax return.  Meanwhile, China continues to lose its appetite for U.S. Treasuries:

China trimmed its holdings of U.S. Treasury debt 1.3 percent in February, the fourth consecutive decline. Those reductions are raising concerns that the U.S. government could face higher interest rates to finance its soaring budget deficits.

Higher interest payments to foreign bondholders will require a greater contribution from U.S. taxpayers.  Rising tax rates after 2010 are thus inevitable, either from Paul Volcker's proposed VAT (a good idea IMHO) or some other source.  Forget about revived consumer spending.  If your kid wants an iPod or some other cute trinket next year, tell them to go mow somebody's lawn and earn it themselves.  When they grow up to pay their own taxes they might ask you about what life was like in the good old days, before real hardship.  You can tell them we're living in the good old days right now. 

Junk Bonds And U.S. Debt: What's The Difference?

My past few posts have beaten up on U.S. government debt for one reason or another, and I'd like to thank my commentors for taking note.  I see no need to quit while I'm ahead, so let's bash U.S. sovereign debt some more.  First, let's check out the coming bolus in high-yield debt (a.k.a. junk bonds) that needs to be rolled:

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.
(snip)

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

Private debtors won't be the only ones to face higher interest rates and declining ability to pay in the next couple of years.  Uncle Sam isn't far behind them, and the article above notes the huge U.S. sovereign debt load that has to be rolled in the same time frame as all of those junk bonds - all while the economy remains weak and on the cusp of a double-dip recession.  My recent posts examined the threats facing U.S. taxpayers and Treasury bondholders.  Foreign bondholders are increasingly moving to minimize the risks they may face:

China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of U.S. government debt in January as a measure of demand for American financial assets fell to a six-month low.

How is all of the U.S.'s debt - sovereign, corporate investment-grade, and high-yield - going to be rolled at a time when the largest customers for our lowest-risk debt are slowly backing away?  That's anyone's guess.  I'd prefer not to guess, which is why I'm not buying any bonds at all for the foreseeable future.

Greece is Europe's First Hollow State

Some of you may know that I'm a fan of John Robb's work over at Global Guerrillas. His thesis that transnational actors are working to hollow out nation states is proving to be more accurate with each passing day. Check out this news item on how Goldman Sachs has appropriated Greece's wealth:

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.


Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

Goldman bankers possess asymmetric information, i.e., they are probably more well informed of the workings of financial markets than Greek civil servants who are overpaid just to make it through the day. When this trend reaches full bloom here in the U.S., we can expect to see bridges and toll roads owned and operated by investment firms. Ownership of municipal assets will be auctioned off by your bankrupt city and state governments to feed their employee unions' pension funds.

If you can't beat 'em, join 'em. I'd like to get in line to buy some publicly owned assets. The Golden Gate Bridge would look great with the Alfidi Capital logo on it.

Nota bene; Anthony J. Alfidi has no investment position in Goldman Sachs or Greek debt at this time.

China Shows Its Hand, Smacks U.S. Debt

China's alleged move to sell the riskiest assets in its foreign reserve holdings is the talk of the markets. The Asia Times isn't exactly the most reputable news outlet, but no official Chinese source has yet moved to dismiss or deny the alleged leak so it may turn out to be legit. This (alleged) turn of events should be the final nail in the coffin for investors' expectations of recovery, if the Greek bailout saga hadn't accomplished that already.

Get ready for the next massive leg down for U.S. equity prices, coming soon to a 401(k) balance near you.

The Haiku of Finance for 11/21/09

Dollar carry trade
Pushing up markets worldwide
Prepping a big crash

Strong Dollar, Strong Equities: Chicken vs. Egg

I like Bespoke Investment Group. They do some original thinking and helped inspire me to create my own virtual investment firm. A good example is this description of how a strong dollar is associated with a bull market in U.S. equities.

Nice job guys, but let's take it a step further. What's the reason for the apparent correlation? Does it mean that investors who hold dollars with more buying power are more likely to demand equities, thus pushing up the value of the stock market? Not if they're foreign investors, because it would take more of a weaker currency to buy a dollar's worth of a U.S. equity share. And not necessarily so for a U.S. investor either, since their stronger dollars would make investments denominated in foreign currencies look more attractive (think about it, just as imported cars and bananas would be cheaper).

Maybe it has something to do with U.S.-based multinationals being able to lower their costs by seeking foreign sources for inputs like raw materials and labor. Costs go down, earnings and share prices go up. Who knows for sure, but the guys at Bespoke are becoming notorious for provoking me to think like this. Thanks, guys; maybe I'll call you the Notorious B.I.G. (meant in jest, of course). :-)