Rathbun: Two sets of booksWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
As I am writing this it is Wednesday afternoon and so much is scheduled to take place by the weekend when you will likely read this. Thursday, the Supreme Court is said to come out with their ruling on “Obamacare,” between now and Monday several leaders of the European Union are supposed to get together and come up with another plan that no one will implement. In the meantime, every day brings either good news or bad news about our economy and the market reacts, or should I say overreacts, accordingly.
One of the big things that caught my eye, however, is the story about China may not be giving out accurate numbers regarding its economy and that they may be worse off than previously thought.
When I first got into the business of investing money for people (1981, I am not as old as I look), I would regularly avoid investing in the Pacific Rim because back then we knew that these governments and the different industries always had two sets of books. One set was the real numbers and one was the numbers they showed to people. This was standard practice as was paying a price for the right numbers.
As time went on and China developed into the world’s largest emerging economy and No. 2 overall, many people have forgotten that two sets of books is still the norm. The quality and accuracy of the Chinese economic data is creating increasing concerns since this economic downturn is coinciding with the changeover in many top leadership positions.
Officials at all levels of government are under pressure to report good economic results to the powers that be in Beijing so they can receive promotions. This is especially evident in the usage of power around the country. Government officials don’t like to see negative numbers so they report power usage declines as zero change to the power managers up the line.
By the time it gets to the top, the numbers have been embellished so many times that the real numbers are no longer even close to reality. Everyone along the line knows this but they all pretend they don’t for the next manager up so they don’t get their head cut off.
One of the reality checks we can do as investors is to see what China is actually spending their money on and what economic policies they are putting in place. For example, recently, the reserves needed for their banks were lowered because banks were not lending enough money. Lowering the reserves allows cash to be freed up so they can lend more. This indicates that people or businesses are not interested in borrowing and expanding since the demand isn’t there.
A second reality check is watching very closely the commodities markets and what China actually takes delivery of. Prices for commodities like oil, coal and copper have fallen dramatically since this spring and reports on the ground tell us that there are large stockpiles of coal around the country waiting to be used for generating power. In fact, recently China canceled shipments of coal that were already on their way to their ports for offload. Shippers had a choice: Turn around and go back or lower their price.
At first it was thought of a shrewd way of getting the coal for a lower price, but now we think that they just didn’t need it and didn’t want to spend the money.
It is a longstanding practice to inflate numbers to the next bureaucrat above you. This happened before in China regarding the production of wheat. People were literally starving to death and the reports going to Beijing were showing record crops throughout the country. People heard the other reports and traveled to the next province in hopes of getting some of the surplus to survive on, only to find that they inflated their numbers also.
So what’s my point? There is a huge disparity between what is reported and reality … it is a crucial time for power change in the capital, and a regime that people are accusing of misreporting important economic data for years.
Sound familiar? Could this mean that some of the critical data coming out of our government is massaged or made up? No chance, right? You’re probably right, but I am still not going to take the data coming out at face value. Do your homework and be skeptical.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants Ltd. He can be heard at 4:06 p.m. every day on “After the Bell with Brian Wilson and the Afternoon Drive” and at 6 p.m. Wednesdays and Thursdays throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or e-mail him at email@example.com.