MERRY CHRISTMAS FROM CHINA

According to Customs figures, China exported $1.6bn worth of Christmas products in ’03, of which more than half went to the US -- including seven artificial trees erected in the White House. China’s export of Christmas-related goods in the first nine months of ’04 amounted to $850m.

More than half of that – $510m worth – came from South China’s Guangdong province, the country’s major exporter and the heartland of its manufacturing boom.

In the US alone, unless your family purchased a natural tree, you would have had a 70% chance of celebrating your Christmas with an artificial tree manufactured in the city of Shenzhen in Guangdong.

Starting his own business only three years ago, Cheng said one of the most difficult things about making Christmas decorations in a non-Christian country is to understand Western culture and meet its requirements.

“They have different perceptions of colours. They like white trees, which is supposed to be a funeral colour here and doesn’t seem appropriate in this happy season,” he said.

Despite the hi-tech fibre-optic trees his company makes, Cheng said the old-fashioned, green-needle ones are still the most popular.

Cheng’s turnover this year has doubled to $6m, but he says rising prices for plastic, the raw material of Christmas, along with increasing salaries, are cutting into profits.

“I should start thinking about developing products for other Western festivals, like the Valentine’s Day or Halloween.”

THEME: IRAQ VS. CHINA
There is an article from yesterday's NYT about proposals to strengthen ties between Canada and China:

"A China agreement might serve as a wake-up call for the U.S.," said Bob Dunbar, an independent energy consultant here who until recently followed oil issues at the Canadian Energy Research Institute.

Executives at energy companies and investment banks in Calgary say an agreement with the Chinese could materialize as early as next month. Ian La Couvee, a spokesman for Enbridge, a Canadian pipeline company, said it was in talks to offer a Chinese company a 49 percent stake in a 720-mile pipeline planned between northern Alberta and the northwest coast of British Columbia.

The pipeline project, which is expected to cost at least $2 billion, would send as much as 80 percent of its capacity of 400,000 barrels a day to China with the remainder going to California refineries. Sinopec, one of China's largest oil companies, was said by executives briefed on the talks to be the likeliest Chinese company in the project.

History will note that the Iraq War was really a blessing to China. Normally, the US would view the growing Chinese economic might and ambitions with hostility. Instead, the Bush Administration is so tied down with suicide bombers and an overstretched military that they are ignoring the growing economic threat that China poses. As further evidence of W's obliviousness to anything other than Iraq, look at how its essentially given a pass to Putin's rollback of democracy in Russia and associated satellites, e.g. Ukraine.

USA & China play the same roles that Britain & USA played in 19th Century: debtor vs. creditor, Empire vs. financier. Like Britain, the USA is an Empire that whose ambitions are sowing the seeds of its long-term demise. Like Britain, we see the world as a better place under Pax Britannica/America. In the aggregate, it probably is as peace is preferred to chaos. But the ultimate benefactors will not be the Britains/Americans, but the lenders and manufacturers who are profiting from those ambitions: the Chinese.

THEME: FORGET PEARL HARBOR, REMEMBER PEBBLE BEACH

The media has declined to remind us that today is the 63rd anniversary of the bombing of Pearl Harbor. So, if you didn't know it was, you know it now.

In a seemingly unrelated note, here is a quote from a WSJ article today:

To suggest that the U.S. is a triple-A credit "would be to suggest that it can pay its bills over a long period of time in a stable currency," says William Gross, chief investment officer at Pacific Investment Management Co., or Pimco, which runs the nation's largest bond mutual fund. "That is no longer true."

Bill Gross has been quite negative on the US dollar and its bonds so this opinion is certainly fitting. What is interesting is this particular angle.

Of course, no self-respecting credit agency would even entertain the thought of downgrading the debt of the US government. It is the benchmark by which all credit is based off of. But what does it say about the whole credit-rating agency system when they are more than happy to slap the face of Japan even though they have consistently run trade surpluses against the US for decades now?

In a sense, the credit-rating agency system is just another arm of the American Empire. Americans like to believe they are fair, but they are simply unable to see the world through others' eyes.

The one intriguing idea from the same story:

Such deterioration might force foreign bondholders to demand that the U.S. issue more of its debt in foreign currency, which would be one of the longer term risks to the rating, says Moody's Mr. Hess. "The U.S. is a long way from not being triple-A," adds Lionel Price, Fitch's chief economist. "But it's not set in stone."

Today, this concept sounds like heresy. However, I remember not too long ago, when alarmists were raising the specter of the US having to issue Japanese Yen denominated debt.

Remember during those golden Reagan days when the term "Japan bashing" was invented? Japan was a threat to our national security. They were planning payback for our dropping of "Little Boy" on Hiroshima. We clever Americans took action and promptly sold off bits and pieces of our famous assets to the Japanese at ridiculous prices, only to buy them back later cheaper. Forget Pearl Harbor, remember Pebble Beach!

What is different this time is that we no longer perceive any country as a threat (Al Qaeda is still country-less). Where are the xenophobes when you need them? Where are the Congressmen smashing Chinese made toys on the steps of the Capitol building? No, they are too busy chasing down those suspicious looking Muslims.

The Chinese have learned from the Japanese. Keep a low profile. Smashing Chinese goods means smashing Wal-Mart. And we know from John Kerry's loss that labor would rather lynch Al Qaeda than lynch Wal-Mart executives.

This is great cover for China. When China revalues the yuan, and our inflation goes through the roof, we'll all be shaking our heads wondering why didn't we see it coming.

China will succeed where Japan failed.

THEME: MORE THOUGHTS ON BUSH RALLY

The market rallied sharply after George W. Bush was re-elected partly because on the flip side of the coin, a Kerry victory would've meant a much darker picture for business in America.

Consider this lead for an article in the National Post, a Canadian newspaper:

New York Attorney General Eliot Spitzer has taken on Wall Street and vowed to clean up business methods but his enemies have accused him of resorting to 'Wyatt Earp legal vigilantism'

In a Kerry world, Eliot Spitzer would no longer have to split his time between attacking corporate America and helping 100 "Central Park pretzel vendors outside his 5th Avenue apartment" get backpay. No, he would be Wyatt Earp as US marshall not local town sheriff. He would be the Attorney General and threaten the Fortune 500 richest people with Federal supoenas.

In an Eliot Spitzer world no CEO of any major corporation would be safe. His corporate fraud hotline would be ringing non-stop, and he would bring us back to an era of Teddy Roosevelt trust busting or Bobby Kennedy taking down US Steel.

Instead, we are left in a world where GOP disses SEC Chairman William Donaldson for adopting too many Democratic sponsored reforms. Hmmmm...let me get this straight, wasn't he brought in to, unlike his predecessor Harvey Pitt, actually reform the SEC so that it would go after business fraud with some teeth?

So, we are not in that era. What does that mean? It means that the public is still not angry enough. It means that barring a general crash in all assets (stocks & real estate), the public will not be angry enough to demand real reform.

So, in the short-run, all of the corporate shenanigans can continue with the occasional perp walk thrown to the press. In the long run, the dollar will continue to sink until the rot is exposed.

Is a crash inevitable? At some point it will be.

I think Eliot Spitzer's career will be a key one to watch in the next 10 years as it will be shaped around such events.

THEME: INFLATION & STOCKS
Here is an educational tidbit:

Perhaps the shoppers were saving their pennies for Starbucks (SBUX), where same-store sales surged 13% last month with the aid of a price increase. The stock frothed 2% to a new record, even though the boss noted that such an "extraordinary" growth rate can't be sustained.

Perfect example of a winner in inflation. People have basically not cut down on their triple soy latte with foam drinks. SBUX is printing higher earnings just based on being able to pass the cost of inflation over to its customers. On a nominal basis, this makes SBUX stock more attractive. Of course, this is an illusion because although SBUX may look great in US dollar terms, in Euros its not looking so hot.

So a weaker dollar is linked to inflation, and at least in the case of a company that can pass on its costs, it is nominally good for the stock, but only when it is viewed from the eyes of a domestic shareholder.

The question becomes, just when does the general inflation lead to a substitution effect? How poor do people need to feel before they look at 7-11 coffee as an alternative to their expensive lattes?


I am not sure that I am the answer to this one, but I think I'll know when we get there.

P.S. Apparently, the Wal-Mart shoppers haven't been going to Starbucks.