RichRussell on China, Gold (new Shanghai Gold Exchange)
October 21, 2002 -- Reading Fortune magazine is almost a "must" these days. With the stock of AOL-Time Warner sinking, maybe the gloom has overtaken Fortune magazine (Time owns Fortune magazine), but at any rate, Fortune calls the shots as they see them, and they are not always bullish with a perpetual "buy, buy" bias.
The cover story of Fortune states that real estate could be the next "problem." The article makes the case for real estate being overpriced, and the gist of the piece is that real estate prices won't continue to rise.
Another article warns that "Ford Careens Toward the Junkyard. . And because of rampant 0% financing, Ford's financial arm has a ton of bonds outstanding, a hefty $157 billion in debt, $23 billion of which must be renewed in 2002 alone. The problem is, Ford is 'barely covering' its interest expense today."
In a rather shocking article, Fortune turns to "GM's Slow Leak. GM is banking on 0% financing to pump up sales and earnings. But it has a hole in its balance sheet that won't go away." It seems that GM's tab for future health-care expenses over the next 13 years is a staggering $38 billion in today's dollars. Even worse, is GM's pension plan. GM's obligations are now $76 billion. At the end of 2001 the company was short $9 billion. Put it this way, GM is going to be squeezed via its obligations to workers. On top of everything else, GM is literally giving away cars to keep its factories open and to retain market share.
What's happening to GM is happening to many other large companies, maybe not on as large a scale -- but it's happening.
Meanwhile, if you remember, I warned a few years ago that China might not be the fabulous source of sales from the US. I disagreed, I thought that China would be a fabulous source of supply.
Now the China competition story is gaining increased publicity. The LA Times (a great newspaper) yesterday ran a big story on China. The crux of the China story is this -- China is not only manufacturing everything from washers-dryers to children's' toys, but China is moving rapidly into high tech. China also has an inexhaustible supply of super-low cost labor. The average worker in China makes 40 cents an hour -- one sixth of what a Mexican worker receives and one-fortieth of what a US worker earns.
China's merchandise exports last year came to $266 billion, with 41% of those exports going to the US. China passed Japan last year as the nation with the largest trade surplus.
Russell prediction -- Within a few years I believe that the Chinese yuan will be made convertible -- the yuan will become a major currency along with the dollar, the euro and the yen. With its huge trade surplus, I expect the yuan to become a strong currency. And I would not be surprised if China, in its competition with the US, backs its currency with gold. Remember, the nation with the strongest current account and trade surpluses is the nation that tends to attract gold to its shores. Can you picture the attractiveness of a gold-backed yuan?
Anyone wonder why China has just opened its new exchange -- the Shanghai Gold Exchange?
More follows for subscribers. . .
Richard Russell
Dow Theory Letters
21 October 2002
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