Perfect trade partners

U.S. and China should be best trade partners. Most of their major products are needed to each other. Today’s low transportation cost is favorable even their distance is far away. EU countries produce many of our products such as jet planes. Hence EU and U.S. are not perfect partners. However, they are allies with similar ideas in cultures and governments. The following are the benefits for both countries and what would happen for a full-fledged trade war.

o   Agriculture. China has about 20% farm land of the U.S. For example, U.S. is cheaper to produce one pound of beef in the U.S. even the U.S.’s living standard is substantially higher.

o   Energy. Per capita, China is lacking in energy resources. LNG would be one of the biggest export to China.

o   Technology. In general, China needs many high-tech products such as chip technology to produce machines that produce memory.

o   China is good in adapting technologies to applications / consumer products. China lacks of basic research that U.S. has accumulated for decades.

o   China still has abundant of skilled labor and sufficient infrastructure.

o   China has a huge market for U.S. products. To illustrate, an approved drug could save thousands of lives in China.

o   It has benefitted many of the U.S. companies. It may have saved GM from the second bankruptcy.

o   U.S. had a services surplus of $40.5 billion in 2018. The leading services are travel and education.

o   The cheap Chinese products are beneficial to the U.S. consumers. If the trade war continues, many factories of these products will be moved to other low-wage countries and our total trade deficit will not change.  

o   Many U.S. companies such as Apple, Nike and Boeing are making good money from the growing middle class in China. When we move the factories to low-wage countries such as Vietnam and India, they are not wealthy enough to buy our higher-end products.

o   Traditionally China’s saving rate is high and should be better as a lender. It is changing due to the debt bubbles in China.

One Belt, One Road (updated)

Chinese is building two modern silk roads, one by land and one by sea. It has been participated by more than 60 countries. It is a $3 trillion infrastructure campaign funded mostly by China. It would take about five years to complete. The idea is from President Xi and was initiated in 2013. It is natural for China: use of excessive infrastructure industry, higher wages in China, alternate routes for energy / ores and rising internal market demands of foreign products.  There are multiple purposes:

·         Improve transportation of products between China and Europe and resources / energy from Middle East to China. From China to Germany by train, it would shorten the fright time from 2 weeks to 14 days. The cost would double and hopefully it will be reduced. Some goods have cost less already especially in Western China.

·         It provides better market for Chinese products.

·         Enrich the wealth and living standards of the countries between the routes especially the developing countries, which should benefit when U.S. and the West reduce their foreign aids. China’s objective is to make the poorer countries rich as a responsibility to the world. Most affected regions should increase the GDP by 5% on the average.

·         Eventually China’s higher-value products will catch up with the West and the U.S. When the developing countries are richer, they are the target markets.

·         It would strengthen the western China and the affected countries in economics, in politics and cultures.

·         It could reduce some conflicts. Philippines received billions on the loan and has downplayed the islet conflict with China. Hence the chance of Chinese military interference would be reduced.

·         China’s Yuan could be used as the reserve currency instead of USD.

·         Improve China’s political, military and cultural influences in these countries.

·         China needs their energy supply, natural resources, energy, trade and road to Europe. Protect the important oil route by providing one by land and one for sea.

·         Most infrastructure products are financed by China and built with Chinese management and technologies, hence using China’s excess capacity such as building roads and bridges.

·         In case of military disputes especially with US, the land route would be an important alternate route to oil and other important resources.

Many developing countries and provinces in west China will benefit. Many projects will be financed via Asian Infrastructure Investment Bank (AIIB), which is mainly funded by China. China may supply most of their services such as building factories or improving ports. However, China will not see their profits from the investments in the short term. Some loans will be partly donated to friendly allies. The major challenge is many countries with many land in desert and semi-desert may not be able to pay back the loans.

China should concentrate on soft power by promoting mutual respect and understand local cultures and reducing military conflicts such as South Sea with Vietnam. All the signed contracts could be overturned when a new governor comes into power. The participating countries should be careful on the ability to pay back the huge debts. Some countries may not want to change from their present lifestyles.

US is not participating in this campaign. We will not benefit from these agreements and we will lose our influences to the developing countries. However, some big projects require advanced technologies and they will be supplied by US corporations such as turbines from GE. Honeywell and Caterpillar will likely benefit. India may not participate due to the road thru a territory claimed by Pakistan.

As in most projects, China will face problems and challenges. Thailand and Indonesia are modifying their original railroad projects. The project is easily accepted in developing countries but not in developed countries such as EU. China is having its own economic problems. Some projects may not pay back and China would end up losing money. China needs to analyze the projects carefully. China has to settle the islet disputes in South and SE China Sea. The natural resource prices are lower than 3 years ago.

It is better to invest in profitable infrastructure projects than selling destructive weapons. Many finished projects such as the major railway in Africa do not benefit China and even the host so far. They need to select those projects that are beneficial otherwise it would be a waste of resources. A train started from a Chinese city to arrive in London and another one to Madrid. In general, it is faster than sea route and less expensive than air fright. Or, it is more expensive than sea route and more time consuming than air fright. Many products such as red wine are suitable to ship by train. It also depends how far the products are from the closest seaport or railway station. In general west China and their neighbors will benefit more.

China has or will face challenges and problems. The finance would drain China’s reserve funds. Many top officers in the countries receive maximum benefits while their citizens are not. Need to resolve them by making more jobs available to common citizens. Some current highways would be abandoned. India will object due to her animosity with Pakistan. Russia may have the own ideas and/or not investing enough in the part of their infrastructure. The southern route would weaken the importance their northern route. The rails among countries are not uniform and that’s why they have dry docks to transfer goods from one rail system to another.

There will be reactions from U.S. and Japan from losing their influences in Africa and S.E. Asia.

Many countries in South East Asia have already been benefited by Chinese investment and infrastructure. Under YouTube, search “Cambodia China Anthony”. Here is one of the series.

Links

Ethiopia Rail, Pakistan, review, Central Asia

Trade: China’s export  

One Belt, One Road: Episode 2, 3, 4, 5, 6, 1 (poor screen quality)

There are many articles on this One Belt, One Road Initiative (OBOR): 1  2.0 (very good from Germany), 3  

Google it for recent articles. Here are some: Wikipedia, US & Heritage.

Challenges

More on value investing

When the market is plunging, most stocks will lose in prices. Hence, it is not a good time to buy stocks.

The best time to buy stocks is when the market is recovering. I call it Early Recovery as described in my articles on market timing. I have about 80% return in my largest taxable account in 2009. During this stage, the average P/E is high but the PEG is improving.

Similar in Early Recovery of 2000 market crash, I had good results but I did not keep good records. At that time I expected the market would recover in two years. I evaluated stocks that had enough cash to last for the two years.

From about Dec. 15, 2018 to early January, 2019, I made over 50% in one month on quite a number of stocks. I bought stocks that had lost about 50% but were profitable. Dec. had the temporary dip. It is a perfect match for the screen and the market fluctuation to my advantage.

The following is my recommendation during a sideways market. First, we want to avoid companies that would bankrupt. Skip companies that have negative earnings especially those with high debts unless they have good reasons. They may have a new drug, a new product and/or are settling a major lawsuit. Check out the Free Cash Flow / Share and Insider Transactions to start.

The most popular P/E may not tell the entire story. EV/EBITDA from Yahoo!Finance takes debt and cash into consideration. In case they are not available, use Pow P/E described in this book to estimate it.

Check out free evaluations from several web sites described in this book together with Finviz.com, Seeking Alpha and Fidelity.com.

Need patience as you are swimming against the tide. It may take a year or two for the market to recognize the true value. Even so, I have value stocks that stay low forever. They may be ‘value traps’. You may want to enter position when the stock starts moving up as evidenced by the positive SMA-20% or SMA-50% in Finviz.com.

As in life there is no guarantee that it will increase in value. That’s why we need to diversify (i.e. not putting all eggs in one basket).  However, the chance of appreciation is substantially increased if you do all the homework described.