International Investing

Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale. China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction. “The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.” “The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.” Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth. Capital Flight The statement by Chen Qi “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows” is interesting. Qi's statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens. A front-page editorial on Friday in China Securities Journal - an arm of the regulatory authorities - warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” it wrote. The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade. It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output,” it said. There have been signs of serious stress in China’s interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default. “Liquidity conditions have tightened severely due to the crackdown on shadow banking activities,” said Zhiwei Zhang from Nomura. China's Credit Bubble About to Pop In a followup post, Ambrose Evans-Pritchard writes Fitch says China credit bubble unprecedented in modern world history China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing. "There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph. Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said. Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for ban

In the U.S. for-profit college operators such as Apollo Group Inc fell heavily last year after the Federal government clamped down on the sector. Most of these operators had become diplomas mills handing out degrees that carried very little value. Abusing the Federal student loan program the companies in this sector signed up thousands of students and made huge profits. They even recruited homeless people to take advantage of the student loan program. Similar to the subprime fraud in the housing industry, this is another example of how government intervention led to disaster. I recently came across a fore-profit company that operates educational institutions in Brazil. Estacio Participacoes SA (ECPCY) is one of Brazil’s largest private-sector post-secondary educational provider based on student enrollment figures. From the company’s website: As of March 31, 2013, we had 334.2 thousand students in our distance learning and campus programs of our undergraduate and graduate courses. Our network consists of one university, four university centers, 33 colleges and 52 distance learning units recognized by the Ministry of Education (MEC), with nationwide coverage, represented by 76 campuses in the leading urban centers of 20 states, strategically located close to the homes and/or workplaces of our target public of middle- and lower middle-income workers. We have highly qualified professors, advanced teaching methodologies and well equipped facilities, offering around 78 traditional and technological undergraduate courses in Exact Sciences, Biological Sciences and the Humanities. We also offer quality post-graduate specialization (sensu lato) courses, master’s and doctorate degree courses as well as diverse extension courses at competitive prices to aid in the professional qualification of our students and enhance their employability. As a developing country, the educational sector in Brazil has the potential to grow significantly. Some of the reasons for growth noted by Estacio Participacoes are listed below: (i) Brazil’s economic growth; (ii) high demand for qualified manpower; (iii) tax and regulatory incentives from the Brazilian government; (iv) increase in the purchasing power of the population and the growing availability of educational loans, both from the federal government (FIES and PROUNI) and from private institutions; and (v) growth potential among the youth from the middle- and low middle-income groups. The company went public in the Brazilian market in 2007. In June, 2011 it launched the level I ADR Program on the OTC market under the ticker ECPCY. Each ADR represents one common share. The ADR opened at over $20.00 in January this year and reached as high as $30.08. On June 5th, the stock split in the ratio of 3:1. Yesterday it closed at $7.92. Estacio announced strong earnings for the first quarter. It enrolled 117,000 students in its various programs and had a total 334,200 students at the end of the quarter.In terms of financial performance, EBITDA was more than 50% compared to Q1, 2012 and net income came to R$66.6 million representing an increase of over 66% relative to Q1, 2012. For more information visit the corporate site here. Disclosure: No Positions

What I learned about investing from Gandhi (MoneyWeek) Are U.S. companies ‘state-owned enterprises’ ? (Canadian Business) Colonisation, the phoney-money way (Business Line) Brazil’s Middle-Class Anxiety (Bloomberg) Chart of the week: a picture of world oil (beyondbrics) World’s Best Developed Markets Banks 2013 (Global Finance) Sector Distortions Can Be Costly in Passive Investing (Alliance Bernstein) Niagara Falls, Canada

Bloomberg reports Brazilian Currency Touches Four-Year Low, Prompting Intervention Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation. “If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.” Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday. The currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.” Real Monthly Chart Shows Intervention Madness click on chart for sharper image Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe. The Financial Times reports Brazil declares new ‘currency war’ Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers. Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil. “When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax. Check out all these recent reports of Brazilian Real Intervention. Is this madness or what? By the way, with the huge slowdown in China (and Chinese demand for commodities plunging), Brazil is going to have a damn tough time stopping the slide in the Real and an equally hard time controlling inflation. What happened to the alleged nirvana "When the real appreciates, it reduces our competitiveness"? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

In response to Pettis on China, Europe, Japan: Bad News for Those Looking for Growth reader "BC" passed on a series of articles about jobs and wages, and matching up graduates with the skills companies seek. The articles are all in regards to China. Change the names and faces, and the stories sound to me like things you could easily read here. The problems are universal: too many graduates, trained in fields where there are no jobs or few openings. Job Prospects for China's Grads Bleak Business Times says Job Prospects for China's Grads Bleak. A record seven million students will graduate from universities and colleges across China in the coming weeks, but their job prospects appear bleak - the latest sign of a troubled Chinese economy. Businesses say they are swamped with job applications but have few positions to offer as economic growth has begun to falter. The Chinese government is worried, saying the problem could affect social stability, and it has ordered schools, government agencies and state-owned enterprises to hire more graduates at least temporarily to help relieve joblessness. "The only thing that worries them more than an unemployed, low-skilled person is an unemployed, educated person," said Wei Shang-Jin, a Columbia Business School economist. Lu Mai, secretary- general of the elite, government- backed China Development Research Foundation, acknowledged in a speech this month that fewer than half of this year's graduates had found jobs so far. China quadrupled the number of students enrolled in universities and colleges over the last decade. But its economy is still driven by manufacturing, with a preponderance of blue-collar jobs. Premier Li Keqiang himself led the Cabinet meeting on May 16 that produced the directive for schools, government agencies and state-owned enterprises to hire more graduates, a strategy that has been used with increasing frequency in recent years to absorb jobless but educated youths. "Any country with an expanding middle class and a rising number of unemployed graduates is in for trouble," said Gerard Postiglione, director of the Wah Ching Center of Research on Education in China at Hong Kong University. Mish Comment: Well, at least China's middle class is expanding, for now. That's not something we can say here in the US. Fake Job Offers Taint Statistics Forbes writes College Grads Are Jobless In China's "High-Growth" Economy The semi-official Global Times reports that one of China’s hottest businesses at the moment is the forging of employment contracts for students. Some universities, concerned about the withdrawal of funding due to high unemployment of their grads, will not hand out diplomas before students supply evidence of imminent employment. The fake contracts, of course, inflate the statistics reported to—and eventually the figures issued by—central educational authorities. “I just can’t figure out why it’s so hard to get a job this year,” wonders Miranda Zhang, who will graduate from a university in Beijing this spring. The misery is spread over many fields. English majors are having a hard time finding work, but so are those receiving degrees in law, computer science and technology, accounting, international trade, and industrial and commercial administration. In short, Ms. Zhang and her classmates face a tight employment situation partly because the Chinese economy is in fact not moving fast in the much-discussed up-the-value-chain transformation. Mish Comments: Are fake job offers in China that much different than the University of Phoenix placing someone with a culinary art degree in a job at McDonalds, while padding statistics as a graduate with a job in their field of study? As for growth in China, forget about it. See the top link if you need convincing. Chinese College Graduates Play It Safe and Lose Out The Wall Street Journal reports Chinese College Graduates Play It Safe and Lose Out. Xie C

Via email here is another update from Michael Pettis at China Financial Markets. What follows is from Michael Pettis. Special points Europe is attempting to resolve domestic imbalances by forcing them onto their trade partners. This will end badly, especially for Germany. China’s new lending, exports, investment, housing starts and GDP growth all continued to slow in May. Many of the numbers came in well below market expectations. This is par for the course. Although we may from time to time get a “pop” in quarterly growth, the overall trend will be for growth expectations to follow actual growth numbers down for many years. China cannot get credit growth under control at anywhere near current GDP growth rates. Even though credit growth slowed more than expected, it is still extraordinarily high, especially for the amount of growth it is generating. Total social financing grew in May by 2.3% of GDP while GDP itself grew by around 0.6%. The IMF claims that China’s real fiscal deficit is around 10% of GDP. This limits Beijing ability to expand fiscally. Although overall unemployment seems stable, unemployment among university graduates continues to be very high. It is early to say but this might have social implications at some point. Adjustment Derailed Away from Europe the US continues slowly to adjust but I worry that this adjustment will be derailed by a weaker external sector. Meanwhile Japan is still struggling with its debt burden and seems to have no real way of resolving it except by forcing down the currency and interest rates, both of which mean that household sector is expected to reduce consumption to support the debt burden without, it seems, any corresponding increase in investment. In China the good news is that the rebalancing process seems to have become more determined than ever before in the past, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China’s adjustment. How much slower? The big worry I have had over the past year is that as China moves to rebalance its economy away from its over-reliance on its investment, with the accompanying investment misallocation, the economy will slow much more quickly than even the reformers expected, so scaring Beijing into backtracking. So far, I am glad to say, this doesn’t seem to have happened. We keep getting surprised on the downside by the growth numbers, but to anyone who understands the way China’s growth model works and who knows the historical precedents, this should in no way surprise. I don’t think China is yet heading towards an economic crash, but I do think that even current growth rates are too high, and sell-side researchers and the various official entities in China and abroad will continue, as they have in the past, to revise their growth numbers downward almost on a quarterly basis. And because growth will consistently underperform expectations, many members of the Chinese policymaking elite, and their effective allies among the shrinking but still large contingent of China-bulls, will increasingly argue that the economic rebalancing is being mismanaged, thereby putting pressure on Beijing to go into reverse. This is the real risk. There is no way that China can rebalance its economy even at growth rates of 6-7%, and attempts to keep growth above that level will simply mean that it will take much longer for China to fix the underlying problems in the economy, that the costs will be much greater, and that the risk of a disorderly crisis will increase. Can China spend its way to growth? Real debt servicing costs are growing much faster than the debt servicing capacity. Clearly this cannot be sustained. There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor

A new Mish iOS app for iPhone and iPad devices is now available on the App Store, and a new version of the Android app (compatible with phones and tablets), is now available on the Google Play store. The original iPhone app is still available in the App Store so you may have to scroll to find the correct one, or you can download it from iOS app link above. Here is the symbol you are looking for: There is no text on the icon for this app. The previous app had the word "Mish" on it. If you had the original iPhone app installed, I recommended deleting it and loading the new app. This link will explain How to Delete Apps From iPhone 5 or iPod Touch. The new app was developed by Stephen Asherson and Rachel Strate at 2Bits, and it's free. Feel free to contact them with any app queries. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

As most of you know, I lost my wife Joanne on May 16 last year to ALS, Lou Gehrig's disease. We were happily married for 27 years. Joanne's three closest friends, Kathy, Marybeth, and Debbie all wanted me to move on, have fun, meet someone and enjoy life. But where does one who is 59 years old find someone? The bar scene may work for someone 21 to 35. For someone 59, the bar scene is a near-certain strikeout. There are numerous online services but most of the horror stories speak for themselves. I do have a close friend who was "successful" on the exact 100th match. No thanks. I decided to try a place called Selective Search. I found them doing a search for executive matching. There are other high-end matching services, but I liked the Selective Search model. One key difference between Selective Search and other executive matching services is only the men pay. The advantages and disadvantages of such an approach should be obvious. The advantage to men is there are far more women in the system. The advantage to women is they do not pay and thus have nothing to lose. Selective Search interviews every candidate and they weed out men who are not seriously looking for a relationship; they weed out women who appear to be gold-diggers, and they weed out people with unrealistic goals (for example a 60 year-old overweight man who wants to find a 23-year-old beauty-queen match). My Criteria Preferably, I wanted someone with a nice smile and slender build, who likes to travel, likes golf, likes to kayak, and likes to play cards. My "dealbreakers" were smoking, someone with young kids, and someone who wanted more kids. Liz was my second date, matched personally by "Molly", my Selective Search matchmaker. Liz, 52, had a cutoff age of 55, but Molly convinced Liz to take a chance. We went out for dinner on Saturday, November 3, then again on November 6, Election Day. Very quickly we started seeing a lot of each other. Since then we bought and decorated a Christmas tree together, have been to Mexico, Mackinaw Island, gone hiking in state parks, and went kayaking twice. We golf regularly, and we even won two regional duplicate bridge tournaments together. The odds of quickly finding someone with those interests except via a high-end matching service is about zero percent, no matter how long one looks. Old Friends, New Friends Liz and Joanne's closest friends have met, and we have even traveled together, to Mexico. Kathy, Marybeth, and Debbie have embraced Liz and vice versa. Kathy, was my "best man" at the wedding. Meet Liz Here are some pictures from our two most recent trips. Click on any image for sharper view. Sipping Tea on Front Porch of Grand Hotel - Mackinac Island Mackinac Island Michigan Carriage Ride Mackinac Island - Fun in Phone Booth Glen Arbor Michigan - Rhododendrons Sunset, Sipping Wine at Sleeping Bear Dunes National Lakeshore, Michigan Sleeping Bear Dunes National Lakeshore Sunset Sleeping Bear Dunes National Lakeshore - Wild Lilacs Sleeping Bear Dunes National Lakeshore - Wild Lilacs Starved Rock State Park, Utica IL, Waterfall After Spring Rain Yes, we got wet taking that picture (Liz got soaked while I was fooling around trying to find the best angle), but it was fun. And, life's too short to not have fun with a compatible soulmate. I am extremely fortunate to have found Liz. And I could not possibly be happier. We are going on a delayed honeymoon at the end of July and early August in Prague (the capital and largest city of the Czech Republic), Munich Germany, and Rothenburg ob der Tauber (a lovely fairy-tale city on the Romantic Road in Germany). I will post some pictures while there. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset manageme

My friend "Lefteris" reports .. Greece decided that all tax returns will be filed electronically. Great! There is no more standing in line at the tax office to file your tax return. This is probably a problem for some older folks, but arguably it's a step in the right direction. Unfortunately, you still have to go to the tax office and wait in line with your ID in order to get a "password" to use the new electronic system. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Inquiring minds may be wondering what would happen if the "Man of Steel" were forced to join a union. The following video explains. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.