Very interesting post over at FT Alphaville on how the Hukou system acts as a drag on the emergence of a large consuming middle class in China and how it ties into the structure of the labor pool and economy. Well worth reading in full.
China Myths: The rapid march towards urbanisation

Fool's Gold

Econbrowser has a great post up about why a return to the gold standard that was being floated around at the Republican convention over the past week for the GOP's 2012 election platform would be a very daft idea.

Return to the gold standard

The key part
"Last month, the average U.S. wage was up to $19.77 an hour, but the price of gold had skyrocketed to $1623 an ounce. That means that for 100 hours of labor, the average worker today would only receive 1.2 ounces of gold. Here's what average U.S. wages would look like if they were reported in units of ounces of gold earned per 100 hours instead of in the usual units of dollars earned.

Under a gold standard, a dollar always means the same thing in terms of ounces of gold that it would buy. So for example, if the dollar price of gold today was the same as it was in January 2000 ($283/ounce), and if the real value of gold had changed as much as it has since then, the dollar wage that an average worker received would need to have fallen from $13.75/hour in 2000 to $3.45/hour in 2012.

And the problem with that is, for a host of reasons ranging from minimum wage legislation, bargaining agreements and contracts, institutions, and human nature, it is very, very hard to get workers to accept a cut in their wage from $13.75/hour to $3.45/hour. The only way it could possibly happen is with an enormously high unemployment rate for a very long period of time. This strikes most of us as a pretty crazy policy proposal."

The Goldbugs conveniently tend to forget the amount of macro-economic volatility embedded in gold-pegged regimes that resulting in very nasty bouts of deflation and unemployment due to its inherent inflexibility. Just witness the Panic of 1907 and the role that seasonal shifts in gold holdings back and forth across the Atlantic had in the run-up to the event.

But then Macroman also put it well here

"The presence of the US's elastic money supply has greatly dampened economic volatility, something that would be greatly amplified by the necessity of pro-cyclical fiscal and monetary policy within the rigidities of a Gold Standard. It is thus far from obvious that the current ability of countries like the US and UK have suffered from having such an economic policy framework.

Those making the calls for a return to the Gold Standard clearly haven't read their history well enough to recall that *all* economic entities suffered from the frequent and severe depressions and financial panics resulting from the lack of a lender of last resort and elastic currency. For all its failings, the study of economics has shown that counter-cyclical economic policies are the most successful way of a) maintaining stable but low inflation [there is a good deal of evidence that low but positive inflation is optimal] and (b) reducing economic and financial volatility. Such a framework is clearly not sufficient, as the excesses of the financial sector over the past decade or so demonstrate, but it is a good place to start, rather than throwing out the hard-won policy lessons of the past 80 years." 

I have yet to get round to checking the site mentioned below in the Macroman post but more good nuggets on the inherent inflexibility and thus resulting volatility gold standards bring. Basically, in a liberal democracy implementing the pain that a rigid gold-peg would bring is very tough... not to say it can't be done - witness the internal devaluation pulled off in Latvia - but it is a big ask and most people would not be able to tolerate it and most politicians don't have the balls to implement it.

"You may find a long history of economic data at Measuring Worth (http://www.measuringworth.com/datasets/usgdp/result.php).

Over the period 1790-1847 during which the US ran a bimetallic standard and experienced relatively rapid real growth at an average rate of 3.8% per year. The volatility of growth over that period was around 2.5%.

From 1848-1957 a period covering various attempts at Gold Standards, the US grew at around 3.4% per year on average, however, with a far larger volatility of 5.7%.

From 1958-present it has grown around 3.2% per year with a volatility of just 2.1%.

The fact that it grew more rapidly in the 19th century is hardly a surprise, given the expansion and industrialisation of the country, but 3.8% vs 3.2% can hardly be termed "much higher". As for the period covering the Gold Standard, 3.4% is statistically the same as 3.2%, though not with more than double the volatility in output."

Oh, and one final thing from Econbrowser to savour on..."For any of you who still believe that Shadowstats provides the only reliable U.S. inflation data, Paul Krugman supplies an amusing observation. The price of a 2012 subscription to Shadowstats is $175. For comparison, six years ago the price was ... $175."

As Churchill might have put it, fiat currency is the worst form of money except all the others that have been tried.

Looking in the Club Med Bargain Bin

With the Ibex having a pretty shoddy week (and half the world is off drinking caiprihinas by the pool in Ibiza and Nice right now!) I thought it would be good to start casing around for bargains in Club Med. I've drawn up a list of some potentially interesting Club Med names.

The Athex, ironically, hasn't had too bad a time of late (relatively speaking) and given how silly cheap the index is there may have formed a bottom for the moment. I am working on Greek names separately - i have a handful of names there that I am gonna do some initial digging on.

Anyway, without further ado here are eight names from Portugal, Italy and Spain (yeah PIS) that have caught my eye.

1980s Mexican Currency Crisis and The Stock Market

I came across this in the July 2010 Bestinver investment letter

"Towards the end of the 1970s, Latin-America experienced a boom motivated by a fast growth

of the credit that streamed through North-American banks thanks to the surplus generated

by the OPEC. From 1980 onward, the petroleum price stopped rising and originated a credit

crisis. The various governments tried to interrupt it in a very similar way as how nowadays

the occidental countries are trying to do: through public deficit and by printing money. As a

consequence of these policies, the currency started to lose purchasing power. If we take the

situation in Mexico as an example: between 1979 and 1987, the currency lost 95% of its value

in reference to the dollar. In this situation... investment in real assets through the stock market turned out to be the best alternative.

At first, the currency depreciated more rapidly than the stock exchange. This is why the

Mexican market hit the bottom in dollar terms in 1983. Nevertheless, and after a period during

which the stock exchanged is dragged by the panic of the currency devaluation and the lack

of confidence in the system, the investor realizes that the companies continue working and

generating positive results (the society continues needing services and products to live) thanks

to their capacity of incorporating the new situation into their production process (moving the

new costs to their final prices and maintaining their capacity to generate added value intact).

This way, the Mexican market hit the roof soon, in 1987, multiplying by 160 in nominal terms

at the beginning of 1988 and getting practically at level in USD. Notwithstanding the stock

market crash that same year, we see how the purchasing power of the savers was maintained

through the stock market, while the investors in bonds (denominated in local currency) or in

Mexican pesos lost 95% of their investment permanently."

Here's some charts of that performance based on the above table. Now I am not one massively into technical analysis but what is interesting is to see how the bottom range in both USD and MXN acted as a fairly steady support through the period while the top-end of the market just swung around like crazy. I suspect while this may have some stuff to do with people looking at buying at long-term moving average supports it is probably more to do with folks stepping in to buy at an inflation adjusted support level for the broader index based on book value/replacement cost (Tobin's Q). Clearly buying in when people are totally freaked out and at the bottom of the trading range would seem to be a decent long-term strategy.... assuming (and it's a big assumption) you can figure out the bottom of the trading range/where the support level is.

Here's a similar chart, although on a shorter time line from CIQ (their data for the Mexican IPC index only goes back to '83) and which only shows the monthly close rather than the range... as you can see it looks pretty similar but doesn't show the low-end support.

The Pain in Spain

Index earnings for the Ibex have peaked out in quite a large way following the Lehman implosion and have not come close to recovering, hence the Hussman Peak PER is very depressed currently (5.1x as of market close Fri 13th July). That is a pretty stark contrast with the SPX where at the index level earnings staged an impressive post-Lehman recovery... and at the index-level at least the US large cap space seems pretty fairly valued.

On a Hussman basis the Ibex is trading 2 standard deviations below its 20-year average, which is pretty phenomenal. Even if things go pretty shoddy for the Iberians one would imagine that there will be some kind of multiple expansion over the coming three years to at least take the market to even one standard deviation below its twenty year average. I.e. a still undemanding 10x peak earnings. Assuming some kind of recovery in earnings - even be it because things simply go to rubbish from god awful - that would imply some potential upside.

At 9.6x the Ibex's TTM PER is higher than the Hussman PER but still flags a market trading at very depressed earnings: about 42% off its twenty year average multiple. (The collapse in earnings back in 2003 kinda distorts the average and standard deviation measures, so I have chosen to go with the median value over the period instead.)

Given how shot-to-pieces earnings are currently in Spain, PBR may be a better way of looking through the prism. Again, things look cheap: 0.8x... although the riposte to all this is how much is the book value of the banks, industrials and real estate plays need to be written off by. Eyeballing the heat map suggests these guys have already taken a fair pounding, although they do continue to make up a good chunk of the index. Still at two standard deviations below the long-term average of 2.4x I would say quite a lot of write-downs look baked into the price right now.

Now clearly this market is not nearly as cheap as Greece but 5x peak earnings is still pretty reasonable (even if it may take a long time for the market to get back to topping peak earnings, although a dose of hyperinflation assuming the Iberians get booted out/leave the Euro could get them there quicker).

Source: CapIQ

SPX Hussman PER

Hussman PER for SPX since 1980

The median for the time period is 16.7; mean is 16.9.... i.e., pretty much identical

The market is around 16x currently, so certainly on this reasonably long-term metric US stocks on an index level don't look piss cheap right now. Of course, at the micro-level there could be bargains. But buying the index probably isn't a ticket to wealth... or at least a phat pension right now.

My guess is wait till September (see page eight) for the Eurocrats to come back from holiday and balls up the financial system in Europe leading to a collapse in Euroblx and triggering some kind of global sell-off for things to get interesting on a broader level in the US.