Higher Wages in China = Huge Opportunities for Mexico

It seems the workers in China aren’t the only ones benefiting from the rise in wages; Mexico has received more offers from US companies to build factories in Mexico over the past year, Reuters states.

Mexico’s wages are now only 14% higher than those in China, a number which was once 17 times bigger in 2002.  Along with the closing wage rates, the price of oil has been going up over the last two years; with these two factors in mind, US companies have looked at Mexico to build their foreign factories.  80% of Mexico’s exports already are sent to the US.

For the US, this would be a good opportunity to continue building a relationship with Mexico.  Not only are the costs beginning to even out with China, but as stated in my most recent post, having close trade proximity is ideal for both countries.  Not only that, but Mexico also imports twice as many US goods than China.  Therefore, helping stimulate Mexico’s economy by providing labor opportunities should only benefit American exports too.

Though there may be concerns with the political and social stability of Mexico, the opportunities to improve the environment surrounding these horrible times is evident.  Look for Mexico to be on the rise in 2011 as they the people are able to gain more employment prospects.

What do you think of building more factories with our neighbors of the south?  Should we still stick with China because their costs remain lower?

For more statistics on Mexico vs China, follow the link below

References: www.reuters.com/article/idustre70p70l20110126

(Post by Evan Amano)

North and South Korea: Is Cooperation Economical?

This past weekend, CNN reported that North Korea has been making attempts to bring peace amongst South Korea.  North Korea is asking the South Korean’s to “open their hearts”, and try to ease the tension that has been going on for decades.

But what I was curious about was to look at this from a different viewpoint than merely political standards.  These talks could be stepping stones to opening up North Korea to the global economy as a whole.  North Korea, a communist nation, has been hit with low economic growth dating back to the 1970’s due to limited trade with the outside world.  South Korea, however, has become one of the fastest growing developed countries in the world, ranking 15^th in GDP.  South Korea also managed to avoid the global financial crisis in 2008-present.

From a geographic standpoint, it would seem logical for South Korea to improve its ties with North Korea.  Even now there is the Kaesong Industrial Region, which has brought numerous jobs to North Koreans due to cooperation with South Korea.  If North Korea were to have more joint expenditures with South Korea, perhaps the success reached upon South Korea over the past decades could rub off on the neighboring country. 

On the other hand, North Korea continues to stand as a threat for not only South Korea (recently in 2010, two South Korean marines were killed by North Korean troops), but for many countries around the world.  Trading with a country that does not stand by the rest of the WTO or other trade organizations could cause backlash towards South Korea.

I personally believe that South Korea should consider trading more with North Korea.  As long as it has the approval from their current trade organizations, developing increased trade with geographically close countries seems to be a smart move.  Not only that, but as it can be seen in international trade, South Korea may hold an absolute advantage on whatever they produce for North Korea, but there will be some products or services that North Korea can offer towards South Korea (comparative advantage).  Though I doubt any improved economic decisions will be made anytime soon, it would be interesting to keep an eye on the political talks that are planned to occur more this year.

On what degree do you believe North and South Korea should get along?  Is it beneficial for both parties to cooperate economically?

References: CNN World. http://articles.cnn.com/2011-01-07/world/north.korea.proposal_1_pyongyang-and-seoul-mount-kumgang-dprk?_s=PM:WORLD

(Post by Evan Amano)

Global Steelmakers Eye Floods in Queensland

Over the course of the week, Queensland, Australia has been dealing with floods that have devastated numerous businesses.  The global steel industry has been hurt tremendously due to the inability to supply coking coal to firms around the world.  75% of the coal fields are unable to operate at the time being, states Anna Bligh, the current Premier of Queensland.  BBC news reports that the Queensland flood could be responsible for a global shortage of steel. 

  During the previous flood in 2008, prices of coking coal rose to $305 per ton.  The current Queensland price is now $253/ton, and stood at $225/ton three weeks ago.  What has been seen in the past due to shortages could be likely again; however, steel analysts seem to believe it is too early to tell whether or not this will have such a drastic effect.  If there is enough coking coal in reserves, there may not be a huge hike in the price.

The Queensland coking coal plays a huge part in steel making globally.  China Steel, a major steel producing company, usually gets 80% of its coking coal from Queensland fields.  Due to the floods, China Steel must now look into the spot market for other alternative supplies to immediately get the necessary quantity for their firm. 

The global price for coking coal currently stands at $250/ton, which is slightly lower than the current Queensland price.  But due to the floods, the global price has gone up by 11%.  It seems likely that there will continue to be a short run price hike due to the shortage, and unfortunately for many firms, may be forced to postpone their work or lose jobs due to the current scenario.  As long as the fields remain flooded, prices will continue to rise.  When the floods cleared in 2008, the price eventually began to fall when coking coal was able to be supplied to companies, but as of now, it is completely uncertain when the floods will stop in Queensland.

References: BBC News. http://www.bbc.co.uk/news/business-12110138

(Post by Evan Amano)

Estonia Added to the Eurozone to Start 2011 While the Euro Drops

As we enter the new year, Estonia has become the newest country in the EU to adapt the Euro as their national currency.  Unfortunately for the Eurozone, this will seem to come at hit to the Euro’s value.  Financial Times reports that there was an immediate drop found on the Euro in correlation to not only the dollar, but the yen and the pound.  The pound had a large drop with the US dollar.  Japan has stated that they support the dollar, as their yen gained tremendous value over the dollar in 2010. 

           

Forex traders have stated that they do not believe that the drop in the Euro was due to Estonia.  This past year has really put doubts within the Euro, and though there was minor growth by the Euro towards the US dollar at the end of 2010, the strength of support by investors is not completely there.  It should be interesting how the rest of the year develops for the Euro and the US dollar.

References: Financial Times. http://www.ft.com/cms/s/0/0e1b1ca0-1730-11e0-badd-00144feabdc0.html#axzz1A1d5j4l6

(Post by Evan Amano)

Upholding Newton’s 3rd Law with UK Bank Bosses

It seems that for many situations among failed banks around the world today, responsibility seems to be avoided by the upper positions of big banks.  As talks of hits on investors for the recent bail-out of Ireland continue, the UK’s Financial Services Authority (FSA) is looking towards the bosses themselves, BBC reports. 

In the report, discussions that bosses of failed banks in the UK could face a “pay claw” of two years due to excessive risks the banks chose to take, one of which was the Royal Bank of Scotland (RBS).  Lord Turner, chairman of the FSA, has stated that this will encourage more appropriate risks established by banks, in hope to avoid any more bank failures.  Also stated is that rulings may also lead to individuals losing privileges to work in the banking sector.

The RBS had to be bailed out two years ago and suffered no consequences at the time being.  FSA officials had stated that there was no support to punish individuals because of the ill-advised risks that the bank ended up taking at the wrong times. 

It seems that there is a common trend in who actually deserves the blame for when banks fail, but it does need to be made clear to many that though high risks can obviously yield high rewards, it is not ideal when the risks can cause the dismantling of the banking system.  Even though pay claws, as stated in the article, are a rule surveyed in the US, the overall responsibility for big banks to bounce back from these risks does not seem to get fully resolved.

Since bank directors are those acting on high risk investments, should they be the ones who take the hit if the bank fails?  What needs to be done to limit high risk banking investments and who should be held responsible for the banks that may fail?  Would it be right to put full blame on these banking directors, or perhaps should investors be more cautious in where they place their money?

Reference: FSA says failed bank bosses could have pay clawed back

(Post by Evan Amano)

Selling Grandma for a Buck.

People all around the world are living longer. It is funny because they are not necessarily living a healthier lifestyle. But with great gains in medical care in recent years we can have our cake and live forever too! Living longer has all sorts of interesting economic implications such as the future of pensions and government funded healthcare, but it also uncovers an interesting investment opportunity for private-equity firms. The increase in the number of old folks has led to an increase in the demand for nursing homes. This demand is limited to primarily rich countries, but nonetheless; in 2009, Americans spent $104 billion on nursing-home care which is a 20% increase from just four years earlier and this percentage is likely to rise. The main goal of any financier is to maximize returns while minimizing risk. The returns are obviously great with enormous amount of money being poured into these facilities coupled with the strong prediction of more to come. However the risk is low too since a great deal of the revenue brought in by nursing homes comes from government reimbursements. This means they do not feel the sting of economic downturns the same way purely private firms do. So, there is the return to risk ratio and therefore private-equity firms are gobbling it up.
Of course there are some unintended consequences (aren't there always?). Another key aspect of any financier is to maximize profit. How do they do that? They trim the proverbial fat. And so while these investment firms may see the benefit of laying off workers at nursing homes in the form of increased profits, old folks may feel the sting of the consequences through diminished quality standards and limited care.
Investment opportunities seem to pop up in the most unlikely of places, especially during economic turmoil. It seems, however, particularly bitter when the ones being exploited are our parents, grandparents, and indeed in due time, ourselves. It will be interesting to see what sort of outcry this may lead to and to what extent the outcry will be heard from country to country.
How much do you think the free market will kick in and help the old folks? Do you think they will really suffer worsened conditions due to layoffs implemented by investment firms? Or do you think the firms will push for increased quality standards to attract more customers?

References: The Economist Volume 397 Number 8710, "Wall Street goes long on grannies" p.73
(This was posted by Trevor Murphy-Mannix)

Germany’s Flourishing Economy...and Where it Could Be Heading

While many nations in the Eurozone are struggling economically, with Ireland officially filing for an 85 billion Euros this past week, Germany is strong and flourishing.  BBC reports from German economic minister Rainer Bruederle saying that Germany is nearing full employment.  The article continues to discuss that though there has been much backlash at the German government for helping bail-out Ireland, domestic spending and faith within the German market has increased tremendously over the past months.  The country’s economic growth from July to September was 0.7%, which was 0.3% higher than the Eurozone average.  The country had come off a record growth of 2.3% in the previous quarter.

With the increasing growth of the German economy, questions may arise as to why it should be involved with the Eurozone.  On Bloomberg Television’s “The Pulse”, a discussion was held on what Germany should do amongst this mess.  While arguments are made that Germany has the opportunity to pull out of the Euro, matters that the benefits of Germany supporting the debtor countries are still crucial for Germany.  A lot of owed debt by Ireland is to Germany, and the benefit to support Ireland is probably ideal.  Both Graham Turner, a chief economist, and George Magnus, a senior economic adviser, believe that there needs to be a focus on credit-debtor relations, and the restructuring of banks are a necessity for the Euro to survive.        

What has to be concerning is the amount of power that Germany has within the Eurozone.  Many fingers point at Chancellor Angela Merkal for stating in October that Ireland will not be able to make it out of their current economic crisis.  This in turn led to investors losing more and more faith within the Irish economy, and can be stated that it has led to the situation that is today.  Perhaps Germany should use this influence to strengthen their ties with the weaker Eurozone countries rather than hurt them.  Magnus believes that the Euro will fall if Germany were to leave the Eurozone, the currency itself would completely collapse.

Where do you think the Eurozone would stand without Germany?  The Eurozone has hindered many countries in different ways.  Should Germany leave the Eurozone, or perhaps is it time for the smaller countries to try to leave the Eurozone?

 

 References:
    "Bloomberg Television": http://www.youtube.com/watch?v=yQ6mJn4C_SY

     BBC News: http://www.bbc.co.uk/news/business-11838365