Wednesday, June 25, 2008

Is Vietnam's market a buy?

The beat goes on – one sector gets pumped up...and then it gets whacked.

Jim Cramer says he’s never seen anything like it...

Not the crash of Drexel Burnham Lambert in the ’80s...not the Asian currency crisis...not the LongTerm Capital Management blowup...not the dotcom bust...

Now, he says, the mood of gloom on Wall Street just gets worse and worse...with no sign of let up. Thousands of layoffs. Stocks in steady decline.

That makes us a little sad, here at The Daily Reckoning headquarters. We don’t like to kick an industry when it is down...and we like kicking Wall Street.

But you can see why the former Masters of the Universe are so blue – their bonuses are falling. So is the value of their stock options.

“Banks struggle to get capital,” begins an article in the Wall Street Journal .

When JP Morgan bought Bear Stearns, for example, everyone thought they had stolen the company. It was clearly the bottom – or so they believed. And they had a $30 billion guarantee from the feds. What could go wrong?

But the whole financial sector has continued to sink...and now J.P. Morgan’s deal is looking less sure.

(Even the best of companies – such as Warren Buffett’s Berkshire Hathaway – are getting beaten down. Berkshire traded at over $1,500 last December. Now, the share is down to $1,220.)

Yesterday, the Dow held steady. But last week was a bad one...with stocks losing 3.8% and the Dow falling below 12,000. Oil gained another $1.38, bringing the going rate for a barrel of crude to $136.

The dollar gained against the euro, and gold fell $16.

What is amazing about Cramer’s point of view is that he seems to be surprised. What did he think? That the bubble in the financial industry could expand forever? Or that the Fed could pump it up again, even after it sprung a major leak?

Sorry, Jim, it just doesn’t work that way.

The financial industry used to represent about 10% of the entire stock market’s earnings. Then, as credit grew, the financial sector invented new ways to separate people from their money. During the period known as the Great Moderation, the percentage of earnings coming from Wall Street rose to 40% of the total. Now it’s coming back down. It’s over.

We don’t have to tell you, but the ‘Great Moderation’ was a big fraud. There was nothing moderate about it. Instead, it was a period of extravagance...excess...over-the-top consumption and borrowing...and outlandish claptrap. It was claimed, for example, that the Wall Street firms were “adding value” by packaging subprime mortgages into securities and peddling them to towns in Norway. And it was believed that the Fed really had learned how to smooth out the business cycle and could henceforth avoid serious downturns. And inflation? That was a problem of the ’70s...not of the 21st century.

But every bubble pops. And the force of a correction is equal and opposite to the deception that preceded it. Naturally, the correction in the financial industry would have to be substantial. Nor is the Fed able to stop it. When a bubble bursts, the Feds can pump as hard as they want; the new cash and credit will go into a new bubble, not the old one.

You haven’t seen another bubble in the dotcom industry, have you? That one blew up eight years ago. It hasn’t come back – despite the best efforts of central banks all over the world. And don’t expect another bubble in housing either. We’ve seen the highest prices for housing – in real terms – that we will probably see in our lifetimes.

Bubbles...busts...bubbles...busts...the beat goes on. One sector gets pumped up...and then it gets whacked.

What’s up next? See below...

*** The next bubbles are probably coming in oil...commodities, and – many experts believe – in emerging markets.

We see the hot air flowing into the oil market, for example. Barron’s reports that $260 billion has gone into indexed commodity strategies – up from only $13 billion at the end of 2003.

And looking at a chart of the NASDAQ, 1990-2000, we find it looks familiar. Yes, dear reader, the oil market 1998-2008 looks a lot like the dotcom market (traded on the NASDAQ) eight years before.

Of course, many are the reasons why you might think oil will get more and more expensive. But so were the reasons that you might have expected the dotcoms to keep going up. And prices of Miami condos to keep going up. And tulip bulbs.

‘Oil is different,’ we can hear you saying. The economy can’t function without it. More and more people are buying it. The Nigerians are blowing up pipelines. Production has peaked out. T. Boone Pickens says it’s going up. The Chinese are hoarding for the Olympics, and so forth.

Maybe so. But human beings err, said Rosmini. The more reasons they have to believe something...the more they tend to believe it to excess. And the sadder they are when their beliefs are proven incorrect.

As to emerging markets, Alan Abelson, in Barron’s, believes they are in bubble-mode too. “Decoupling” is hooey, he believes. When the world economy heads down, they’ll go down with it.

But many emerging markets are already down – big time. Shanghai is off 50%. Vietnam even more. Are they bubbles that have burst...and can’t be reflated? Or are they still bubbles-to-be...waiting for the next gush of hot air?

Today’s paper tells us that Vietnam has done something extraordinary. It has banned gold imports in order to try to reduce its trade gap. Vietnam has an inflation rate of 25%. So, the Vietnamese try to protect themselves in the way people always have – by trading paper currency for gold. So great was this traffic that Vietnam became the world’s largest market for gold – bigger than China or India. And so great was pressure on the Vietnamese economy and its currency, that government officials moved decisively to make the situation worse – by banning gold imports.

Still, colleague Manraaj Singh, for example, thinks Vietnam is a buy:

Vietnam’s Ho Chi Minh City share index continues to be a leader this year. Once it led on the way up, this year it’s been leading global markets on the charge down. The index fell every on trading day in May and in early June as well. It’s now down by 60 per cent since the beginning of the year.

“...Which begs a simple question: are we stark raving bonkers to still be in love with Vietnam?

“At the end of May, inflation in the country hit 25 per cent – the highest level since 1993.

“And then there is the trade deficit. It is expected to be above $15 billion for the first five months of this year. That’s a considerable increase on the 2007 deficit of $12 billion.”

But the Bank of Vietnam is serious about fighting inflation, he says. It raised rates from 12% to 14% last week – still more than 10% below the level of CPI.

Manraaj continues:

“That was the second interest rate rise in just three weeks and makes the highest in Asia. Investors were looking for a sign that the government was serious about tackling inflation and they got one.

“Better yet, the government has indicated that it may raise rates even further in order to bring inflation down to single-digit figures by the end of next year.

“In Vietnam, food accounts for almost 43 per cent of the consumer price index. And the rise in food prices has been a global phenomenon. The global rise in rice prices this year has had a huge impact on Asian countries. In the Philippines, armed soldiers were required to guard the countries rice supplies.

“Even here in London, the Chinese restaurant across from our office has put a 30p ‘temporary surcharge’ on all its rice dishes. ...

“But Vietnam’s finance minister, Vu Van Ninh, says that the country now has sufficient supplies to avoid further price increases, while still exporting 4.5m tonnes of rice this year. So we should see a sharp drop in food inflation in Vietnam this year.

“Just look at the other great bugbear that has spooked international investors – Vietnam’s soaring trade deficit. It isn’t anywhere nearly as dire as it sounds either. Far from it...

Vietnam’s biggest import items are machinery and equipment (‘M&E’), construction materials and refined fuel. These are all items that are vital to the development of an emerging economy. Most of them still have to be imported, but that’s changing fast. A lot of these capital goods are being used to build-up domestic manufacturing capacity – factories and infrastructure. It won’t be long before it is able to locally produce a lot of what it now imports. Take steel, for example. Vietnam is a net importer of steel today, but it’s expected to have enough pr, but it will soon have sufficient production capacity to satisfy domestic consumption.

“There’s a world of difference between a country that has a trade deficit because it is importing equipment and material to build factories, power plants and roads, like Vietnam is doing; and one that has a deficit because it is addicted to imported Sony Playstations, iPods and cheap sneakers.

“Again, we’ve seen global markets reeling under the impact of surging energy prices. But what very few people realise is that Vietnam is actually self-sufficient in terms of crude oil production. What’s been missing is a domestic oil refinery. So the country has actually had to export 100 per cent of its crude oil and then re-import it as refined fuel. That’s been a major contributor to its trade deficit and it’s also been a major driver of inflation. But the country’s first oil refinery is going to come on-stream in 2009 – and that should have a massive impact on both inflation and trade deficit.

Vietnam’s government is obviously on a steep financial learning curve – remember that this is still a Communist country – but they’re learning fast. And, crucially, they’ve shown that they’ve got the will to act.”

Until tomorrow,

Bill Bonner
The Daily Reckoning