The New Leisure Class

By Tom Dyson

Things are usually pretty quiet in the Baltimore HQ at 8
a.m., but a one-line email changed all that yesterday.

"Talk in China is that the yuan will revalue next month 3%
to 5%," was all it said.

The hoopla was ignited by our man in Beijing, Karim
Rahemtulla, hosting a tour for venture capitalists called
the Supper Club.

"That’s the scuttlebutt from several Chinese traders, CEOs
(party connected) and a couple of fund managers," he
responded when pressed for his source moments later. "It
makes sense – there is absolutely no sense of urgency over
here, but they are seeing some pressure from the threat of
tariffs on textiles. It will not be some huge revaluation –
5% would be high – 3% more likely to pacify ‘the West.’
Take it for what it’s worth, if it happens, you will have
the inside track on the number."

Almost instinctively, we picked up the phone and dialed our
‘currency counselor,’ Chuck Butler, hoping he’d be able to
fill in the blanks…

"We’re used to hearing these rumors…they’ve been swirling
around for the last couple of years," he began, "but now
they’ve reached a fever pitch. Looking at the spreads in
the forward market, one has to conclude something’s going

The banks trade currencies at either a spot rate or a
forward rate. The spot rate is the rate you get for
changing your currency immediately, while the forward rate
is the rate you get for agreeing to change your currency at
a certain point in the future.

One month ago, explained Chuck, the yuan was trading at a
70-point premium in the 1-month forward market. Yesterday,
however, that premium had increased to 400 points. One way
of stating this is that the market is predicting a 400-
point move in the exchange rate – from 8.2765 yuan per
dollar to 8.2365 – in the next month.

Looking 12 months ahead, the premium is closer to 4,000
points, implying an exchange rate of 7.89 yuan to the
dollar, or a 5% appreciation.

"We’re still a long way from a floating renmimbi," Chuck
stressed, "if they do anything, they’ll simply move the peg
a notch or two, nothing dramatic, but just enough to
appease our politicians for the time being. The Golden Week
celebrations in the first week of May looks like a likely
time for the move."

Next, we contacted Chris Mayer, Fleet Street editor, for
his opinion. Chris has been researching what sociologist
Thorstein Veblen dubs "China’s new leisure class" – a
burgeoning Chinese middle class with an appetite for travel
and tourism, and a market segment that will grow
exponentially as the yuan floats higher…

"This trend will have enormous investment implications as
the world caters to the Chinese and their spending
patterns.  I have written about the growing number of
Chinese tourists before, and my latest investment idea is a
play on the idea of this new leisure class. It doesn’t take
a lot of imagination to picture how traveling Chinese with
money burning holes in their pockets will benefit hotels,
for example."

In 2003, according to the World Tourism Organization, some
20 million Chinese traveled abroad spending $48 billion
dollars in the process. The WTO project 13% annual growth
in Chinese tourism over the next decade and by 2020, some
100 million Chinese will travel abroad each year for their
holidays, making China the fourth largest source of
outbound travelers, they say.

"Increasing affluence in China, and the emergence of a
large middle class, will help the travel industry
generally. Interestingly, the Chinese like to gamble.  In
2003, 90% of Chinese travelers to the U.S. visited Las
Vegas, so you can see there are many ways to make money off
Chinese prosperity without the perils of investing in

Did You Notice…?
By Marc Faber

Are households becoming richer because of net capital
formation, employment, and wage gains, the traditional
drivers of the economy, or is the increased household net
worth largely a function of easy money policies which have
led to a rapid credit expansion?

In this respect, Paul Kasriel, the chief economist of
Northern Trust, argues that this is one of those rare cases
when the conventional wisdom is correct – that is,
households are saving very little to the detriment of their
future standard of living.

Kasriel starts out by asking the rhetorical question: In
recent years, has household borrowing (a flow concept)
risen relative to household spending (also a flow concept)?

According to Kasriel, the answer is unequivocally yes.

The first chart (courtesy of Paul Kasriel) shows the
dollar-value change in total household liabilities (from
Federal Reserve flow-of-funds data) as a percent of the
dollar-value of total household spending. In 2004,
households total borrowing represented 12.5% of their total
spending – the highest percentage since the 1952 start of
the series. If households’ incomes are so underestimated,
why are they borrowing so much relative to their spending?

Kasriel then suggests that another way to look at the
alleged underestimated after-tax income and savings rate is
to look at households net acquisition of financial assets –
stocks, bonds, deposits, pension fund reserves, etc. –
compared to their net acquisition of liabilities (in other
words, borrowings).

Since the Fed provides the relevant data, presented in our
second chart, it is possible to precisely determine whether
households are saving or dissaving.

Kasriel concludes that, starting in 1999, and continuing
through 2004, households’ cash outlays on goods, services
and tangible assets have exceeded their cash incomes. From
1952, the beginning of these data series, through 1998,
this phenomenon of households spending more than they were
taking in had never occurred.

And the Markets…



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