Considering Mike Chinoy's two decades of service as CNN's Hong Kong and Beijing Bureau Chief,talk of business surrounded by nostalgic Shanghai is the right lead-in to proudly introduce Mike as our newest strategic partner and co-trainer for our media training and communication skills workshop on October 18th at the Langham. Mike is currently the Asia Managing Director for News Certified Exchange, an organization which trains and certifies professionals to be included in their powerful resource database of media-ready experts for journalists. As well, I am pleased to be included in that database as the media industry grapples with change and needs new ways to access knowledgeable experts on China who are also media-savvy.

More About Mike Chinoy

As Vice President and Managing Director for Asia, veteran correspondent Mike Chinoy oversees all business development and certification operations in the region. Mike spent over two decades with CNN, serving as the network's Hong Kong and Beijing Bureau Chief and its Senior Asia Correspondent. Mike is also a Senior Fellow at the US-China Institute at the University of Southern California and authored the book Meltdown: The Inside Story of the North Korean Nuclear Crisis.

About the Media Training Workshop, Langham Hotel, October 18th, 2010

Limited to only three individuals per session, participants will spend a separate half-day session with both experts. For example, the morning session with Mike and the afternoon session with Mario. The content of both sessions will cover the broad theme of expertise and strategic communication with the media

Mr. Cavolo’s session will focus more on detailed scripting and phrases; deep awareness, control and design of all related speech delivery to the media and in other executive/leadership situations.

The session with Mr. Chinoy will focus more on the nature of the newsgathering process, how to prepare for interviews, tips for effective interaction with reporters, and specific pointers for developing a strong presence in front of a camera, including the opportunity to videotape a “practice” interview.

With attendance limited to six, please don't hesitate if you are interested to attend; Contact KBC China's event coordinator, Harry Wong at harryw@kbcchina.com for additional information. The fee for this media training workshop is USD $3000 per person including video and follow-up.

"Critical Communication Skills For Executives" Four seats still left for this event on Sept 16-17th with myself and guest Daniel Smith. If you are an established or rising executive and your interest is critical, detailed communication and behavior skills, without the need to focus on media training, then join us at the Langham on Sept 16-17th "Critical Communication Skills For Executives" with superb guest trainer Daniel Smith

The Prime Directive, the Magna Carta, the Must Be Manifesto of the New Global Economic Reality is:

Interest Rates Must Remain Low. Say Goodbye to Yields

With the markets noting the continuing rise of treasury bonds, the direction of interest rates is called into question, but I maintain that there is no question as to the direction of interest rates; low interest rates are the single core essential requirement to a global economic structure which is sustainable. A recent article by Kurt Brouwer pointed up a bond bubble argument that “...interest rates have fallen so far and so fast that they have to go up at some point and this will hurt bond investors.”

It seems to me the most obvious of observations that if interest rates go up, hurting bond investors will be the least of our troubles. In the new mega-debt reality of today, interest rates simply can't be allowed to go up. They must stay down and all other parameters follow. Remember the "prime directive" in the Star Trek movies? This is the prime directive of today's global economic reality.

Many of my readers and clients are aware that I often argue against the likelihood of doomsday scenarios; that excesses will be absorbed and wound down over time rather than a D-day.

However, rising interest rates is the fire that will light the fuse to global economic hell with the heady heights of sovereign debt which has hit multi-trillion multiples of GDP across the global economies. Everything else follows this core top priority. In the absence of rising interest rates, the elitists and governments have many other chains they can yank on and indeed, they will do so. Think for a moment of the skyrocketing expense if interest on a few trillion goes from 2 to 5%; unequivocally devastating.

Stated another way, maintaining low interest rates allows even just the possibility of a “sustainable” nightmare, while many here even disagree with that. While a rising interest rate environment is unequivocally unsustainable.

Historical chart shows us steadily declining treasury yields and there is no reason to expect that will not continue in a world where the mere preservation of capital is becoming more and more a priority regardless of lousy yield while praying that the value of the currency isn't decimated too quickly.

Chart source: FundMastery

If printing billions in currency out of thin air is the response chosen, as has been the case, then the cost factor to release that fresh liquidity into the economy must remain low. Its a matter of scale right? For example, just like the big grocery stores who average a tiny 1% mark-up, a tiny mark-up compared to the mark-up closer to 15% needed by smaller stores to generate a profit.
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Of course we can argue the other side; the damage being done to the economy by flooding the market with these out-of-thin-air billions, not to mention that the banks receiving it are hoarding it. I read recently that banks are holding onto three trillion cash; not to mention corporations are also hanging on their cash and so they’re going to bankrupt the system. There are dozens of such legitimate observations but all secondary to the root issue.

Mario Cavolo
Shanghai

Frankly, they like it that way. Wouldn't you?

Your first eye-opener can start in Chengdu, Sichuan province, circa 1999, when you learn that a certain well known local Chinese government office needs to hire several foreigners to do some much needed editing for the program of an upcoming international conference hosting heads of state from all over the world. On the day to collect payment for said editing work, the local gov't official opens the one square meter sized office safe at which moment you can't resist peeking to notice stacks and stacks of cash inside. That's not to say the cash is not fully accounted for and reported within the system. This story is simply to point out the mere tip of the cash economy iceberg in China. It is in fact amongst the wealthiest in the country where most of the cash is changing hands. We often go to the bank where it is normal policy and procedure to take your "bag of cash" to make the payment on the home you just purchased. While that bank transaction is definitely recorded at the bank and government real estate office, where that cash came "from" runs deeper into the mystery of China's not-so-hidden economy.

This not-so-little gem of trillion dollar knowledge has finally made it to international headline status courtesy of a research study commissioned by Credit Suisse.

Highlights from the report include:

"...The study found that the "hidden" household disposable income could be as high as 9.3 trillion yuan in 2008, equivalent to about 30% of China's gross domestic product."

Ok, now we're cookin'...

"...the flow of funds data don't accurately track the income of top households because much of it are the results of "illegal or quasi-legal" activities."

How do you define quasi-legal please and in what culture?

"...the shortfall in the figures revealed in the economic census and what households really received -- at 5.4 trillion yuan in 2008."

Enlightenment approaching...

"...Credit Suisse said investors may be setting their sights too low when it comes to gauging the impact of this vast pool of wealth."

That's a big bingo.

So then, above and beyond the known $2.4 trillion of government reserves, plus my estimated $15 trillion of mortgage-free home equity amongst the middle class, plus the known highest savings rate in the world at 36%, now we factor in an ongoing cash economy that has finally been estimated at between USD $1 to $2 trillion.

When you are perusing analysis of China's economy that somehow blindly dismisses a trillion or two in its underlying assumptions, you can safely conclude that whatever gloomy conclusion the author comes to is full of holes and laid on a rickety table with 3 legs.

Let me ask you a couple of questions:

If you owned a home without a mortgage and it declined in value by 30%, would you freak out? No you wouldn't. You wouldn't fall behind on payments and you certainly wouldn't foreclose.

If you are a typical middle class American, but had no debt and, for example, $50,000 or more in your mattress and you lost your job, would you freak out? No you wouldn't. You have time to regroup and redirect your life.

You're starting to understand the much more comfortable and secure situation which exists for somewhere between 100 to 300 million Chinese citizens.

Home Sweet Mortgage-Free Empty Home

Empty homes in China are a bank account, a long-term store of value. Note the anecdote of "Henry" below on the subject of overseas Chinese coming back to China to buy property for their future retirement:

At a recent Naked Capitalism article on China, commenter Henry says:
August 4, 2010 at 8:23 pm

My parents...went back to China 10 years ago and bought 4 apartments for their retirement...I think they paid $300k for all of them with cash. Today they are probably worth $2m (million). Along with my parents, I know most of my parents’ Shanghainese friends also did the same thing. My point is that a lot of these vacant apartments are owned by overseas Chinese planning their retirement, and not for speculation."

Where do you think people in a hidden $1-$2 trillion cash economy can put all that cash? In India, they buy a lot of gold to store value and Chinese are just starting to do that too. But real estate is by far their first choice. Hence, relative to vacancy levels you might otherwise consider healthy in other real estate markets, you will find higher vacancy rates in China from long-term mortgage-free property purchases which serve a meaningful and understandable purpose when understood in the context of the entire economy including the grey market cash economy. Suddenly it doesn't seem so strange that there would be so many empty apartments, does it? They were bought for the long-term to build the family estate and and they will be passed on to the next generation.

Richest 10% Average USD $16,000 Per Year: Kickbacks Not Included

This tidbit from the Credit Suisse report is worth further discussion:

"...Average per-capital income for the richest 10 percent, at 97,000 yuan, was 65 times of that of the poorest 10 percent, Wang's survey showed..."

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I am shocked as I note that even this estimate of income is far too low. If you believe that the richest 10 percent in China average only USD $16k per year in income, you're just buying into another inaccurate assumption underlying analysis on China.

One of the glaring inaccuracies of this report is how it attributes the grey market income in China to "stock market manipulation, property deals, vast bonuses from state-owned firms with a monopoly on the market, and even large wedding and other gifts to powerful officials and their relatives." I don't see the word "kickbacks" on the list, yet they are probably the largest category of cash exchange in business. For example, Ms. Wang is the store manager and Mr. Li is the product supplier. Mr. Li will of course give Ms. Wang a thank you kickback of 10% or so if she can get his products into their store with an order. You may ask, does the boss know or care? Of course the boss does know and doesn't care, he used to be the store manager! In the end, if the bottom line cost of goods sold numbers come in line each month on the accounting reports, the system doesn't need any further scrutiny. It is how business is done here.

A friend in the luxury retail products industry wanted to be paid for his product order. The purchasing manager, that's the guy or gal sitting in the accounting office who actually pays the bills, had absolutely no intention of ever paying the invoice without getting his expected share. It wasn't a discussion. It was expected behavior. Middle level managers at small and large companies all across China do business in a perfectly normal and understood manner which includes cash kickbacks to supplement their low salaries. Its the same, for example, with bartenders and liquor suppliers. We could safely suggest this is a much larger percentage of the grey market economy than the Credit Suisse report suggests, barely giving this significant source of income for Chinese employees a mention.

Driving Through Crosswalks

I often speak about how a culture truly brainwashes many of our behaviors beyond the cultural ideals of right and wrong which exist only in that culture. For example, as a American, I used to think that driving through a crosswalk intersection with people in it was irresponsible and insane. Now I understand that in America, that is true, but not true in China where stopping to let people cross will be more likely to cause the accident rather than avoid one. Let's understand why. I have a Chinese driver's license and I think and drive exactly the way Chinese do; that is to say I also drive through cross walks while throngs of people are crossing on either side of my car. You know why? Because if I stopped and didn't drive through the intersection, everyone within 5 meters including the driver's behind me AND the women with their infants crossing the street would think "What's wrong with this guy? Damn foreigner, he doesn't know how to drive!!" And I would be the one causing an accident! The Chinese driver's test clearly mandates that cars yield to pedestrians; that means "slow down and avoid", not stop, and in fact, often the cross-walk lights are green while the traffic flow lights are also green. Everyone knows it, both drivers and pedestrians, and has the rules and expectations crystal clear in their respective minds to act and respond within that context.

So on the subject of Chinese being cash rich, foreigners hear it said but only through the filtering psyche of their cultural bias. This enormously significant piece of the China and global economic puzzle goes in one ear and out the other preventing even otherwise intelligent economic and market analysts from properly integrating its meaning and influence into their views, thereby misleading many. It is an uphill battle to remind every foreigner on planet earth who makes their deeply flawed and filtered analysis of China to comprehend the bare truth of trillions and its significance. There are trillions and trillions and trillions of cash and other asset value here in China; it is woven deeply into the fabric of society from ultra-rich to local workers; from cash to empty apartments passed down to the family heirs. This liquidity is a shadowed powerhouse driving China's economic development and societal trends. As the west faces its unprecedented economic woes, it is a welcome trillion dollar tidbit.

Mario Cavolo
Shanghai

Thirty years later, I moved to China where the word ginger took on new but still daily meaning almost every time I pick up my chopsticks for a meal. Memories of Ginger's glittering bareback gowns, perfectly out of place on their happy tropic island gave way to that tasty, stringent and healthy Asian root by the same name.

Now, much in accordance with the coming inflation of agriculture foods due to increasing global demand, according to recent reports by Xinhua News, the price of ginger, a high quantity staple in daily cooking here, has jumped 18% in the past month through August 15th.

Similarly, three months ago as reported in the China Daily, garlic prices have sky-rocketed, but the profits have gone into the hands of garlic speculators not the garlic farmers who are too scattered to be organized and demand their share of higher prices.

Inflation's Leading Indicators

Along with my now famous China's Extravirgin Olive Inflation Indicator which I first wrote about in 2008, don't dismiss this news as a leading economic indicator on inflation concerns. "China Rising" is a new reality for the world to reckon with and inflation is a much larger piece of that reality than broad, general government statistics suggest.

The rich and nouveau rich 200 million Chinese have plenty of money and so will barely notice or care much about the inflation that comes with growth, expansion and riches. In fact, to further dazzle your statistic-loving global mind, there are 430,000 millionaires in China today, with 77 new millionaires being added every day according to Steven Bernstein, head of Oppenheimer Funds Asia. The Asian gambling haven, Macau, does triple the revenue of Las Vegas with just a few casinos for players. Indeed, the world of the rich is more and more separate from the rest of world's economic reality.

Middle Class Paying The Bill

So what about the other one billion Chinese which includes around 400 million lower middle class and 600 million country farmers? As we easily see America's middle class taking the brunt of the economic punishment from the damage of well known bank and financial industry shenanigans rooted there, these lower income classes in China are also suffering more and more with the price inflation pressure that has arrived and will likely continue for decades to come.

Recent spikes in ginger and garlic price increases follow price increases in staple resources and commodities including chicken, pork, rice, water and electricity here in China. Local service level workers in China do enjoy a very low cost of daily living including ultra-low medical expenses however they typically have equally low salaries of 1500rmb to 3000rmb per month (USD $250 to $400).

So the world watches the new reality of China where progress and expansion and inflation march along hand in hand; where the cost of a street-side dinner plate of rice with freshly tossed veggies and chicken, sautéed as usual with slices of ginger and garlic, goes from $2 to $2.50, and where it goes down a lot harder in the real world. Staple commodity inflation is upon us and this is perhaps the only situation where we can suggest; at least it still tastes good.

Mario Cavolo
Shanghai

The StraddleBus Article at China Hush

HP's Securities and Exchange Commission filings of the past few years have -- in plain sight of investors and journalists -- detailed this excess:

Mark Hurd's total compensation for 2008 (when the global economic crisis reached its nadir) was $43 million, making him the fourth-highest-paid CEO that year, even though H-P's shares lost 29% that year.

CIO Randy Mott's total compensation jumped 400% that year to $28 million.

Imaging executive vice president Vyomesh (VJ) Joshi's total compensation increased 83% in 2008 to $22 million.

Personal Systems EVP Todd Bradley's total compensation went up 263% that year to $21 million.

Technology Solutions' EVP Ann Livermore's compensation went up 31% that year to $21 million.

Now-interim CEO Cathie Lesjak got a 49% bump in total compensation in 2008 to $6 million.
This management team mandated that year that all Hewlett-Packard staffers would take a 5% pay cut for the year, and they boasted that they -- as executives -- would stand shoulder to shoulder with the staff by taking 10% pay cuts. They forgot to say that the executive cuts would be only on base salary and that they would more than make up for that on options, restricted stock units and other bonus goodies.

In 2008, H-P shareholders paid $7,472 for travel expenses for Mark Hurd's family to accompany him on business meetings. They paid $256,000 for Mark Hurd's personal security detail that year. And each executive was able to use $18,000 worth of financial advice that year on the shareholders' dime.

Full Article Worth Reading at The Street

"The rich are richer than ever the world over, with more than enough evidence available to confirm that this is the case. Furthermore, it is so on an unprecedented global scale now that China and her citizens have led the rise of the APAC region to prominence and power alongside the American and European economic blocs. As we shall see, America’s decline is the decline of only one main sector of her economy, along with the rise of others. No, the baby is not going to be thrown out with the global bath water, and there will be no doomsday collapse with one exception: a 30% chunk of the middle class in America whose lives and careers and futures have been decimated."

The above quote is from my recent article published by Wall Street veteran Rick Ackerman at his investment advisory website, and it's point is at the heart of my argument against a severe deflation or doomsday collapse in the global economy. We can easily begin by suggesting that the economic balance of power across various sectors of the global economy are shifting, by both industry and social demographic classes. Meaning, industry sectors such as IT, Energy Services and Healthcare are seeing growth worldwide. While on the demographic sector side, we have the American middle class demographic sector experiencing a serious economic decline; this reality balanced against the Chinese middle class demographic sector experiencing an equally significant rise in lifestyle and economic power.

Threat of Debt Vs. The Joy Of More Wealth

The world is awash in $USD trillions of fresh debt, primarily debt issued by the United States Federal Reserve to avert disaster in the financial markets, and by China's banking system to continue stimulating China's amazing economic growth this past few years.
Yet there is a happy result for some; the world is also awash in wealth, wealth which is primarily in the hands of the increasingly rich and semi-rich of the American, European and Chinese bloc. While deflationists correctly and intelligently point out grave analytical concerns over the stability and corruption of the debt based, derivatives-driven Western banking system including Wall Street, they have discounted too far the power of the world's existing wealth to keep the world humming along. This wealth includes the unprecedented level of new wealth created in China.

Even a conservative look at the middle class housing sector in China reveals 100,000,000 apartment homes which are now worth an average of 5 times greater yet are still priced reasonably. If homes which were worth USD $35-50,000 (250,000-450,000rmb) are now worth a conservative 3 times more, then the total newly created asset wealth is $15 Trillion unencumbered by mortgages. This conservative projection focuses on the broader market of average middle class homes across China, not including the luxury property sector with sky high prices the media focuses on with its concerns about a China "property bubble".
With respect to the complex interconnectedness of the world we live in, China-American relations are at the heart of economic and political stability across the globe. Here we argue that in addition, that Western wealth and China's new wealth together are a force to be reckoned with.

While this wealth is rightfully resented by those millions of people across the globe whose lives have been damaged by the financial shenanigans which continue unabated by the Western banks and Wall Street, this enormous pool of wealth just may be the glue that holds everything together awhile longer, giving our leaders enough time to unwind the underlying mess which continues to threaten the future.

Click Here To Read The Complete Argument and Original Article

Mario Cavolo
Shanghai

The advantages of algae over other types of biofuels, such as palm oil, are significant and help explain the enthusiasm it is generating.

First, algae don't compete with other crops for agricultural land and can even be grown in polluted water. Second, their production consumes large quantities of carbon dioxide, which is a big plus for an industry trying to become carbon-neutral by 2020. Third, algae can be blended with traditional kerosene without the engine or any pipes needing to be significantly modified.

The byproduct of algae production is a high-protein mixture that could eventually be sold for use in pharmaceutical or cosmetic products, thereby helping make the whole project more commercially viable. Last but not least, it has been estimated that algae produces up to 15 times more oil per square kilometer than other biofuel crops.

Complete Article Here at MarketWatch