Is the Worst Over for Asian and U.S. Economies?

Excerpts from Dr. Enzio von Pfeil's May 25, 2009, appearance on CNBC Asia:

1) Discuss news flow from the U.S over the weekend and the outlook for the U.S. economy and dollar.

• The potential bankruptcy of GM will weigh on economic growth concerns. Indeed, one Deutsche Bank analyst says that a bankruptcy would lop four whole percentage points off GDP growth!
• Then there is news of increasing budget deficit concerns . Indeed, what the right hand giveth, the left hand taketh. In this case:
  • Right hand giveth: the Treasury this week will auction $101 BILLION (!) in bonds, matching its previous auction record. And this fiscal year alone, the Treasury will issue $ 2 TRILLION in bonds, whilst,
  • Left hand taketh: via "quantitative easing", (in my world, "quantitative pleasing"), the Fed will keep buying up this paper.
• Well, if the US Economic Time is so great, then why does the Treasury need to keep stimulating the economy?
• Currency markets are giving us the answer: the USD keeps losing gravitas.
  • First, super power currencies always go to Hades: as we see yet again, the Empire runs out of money and so it prints more. For us economists, nothing more is happening than this: an increased supply of dollars drives-down its price.
  • Secondly, markets finally are waking up to the reality of a much deeper, longer US stagflation, something which we called prematurely years ago.
  • Finally, the US, like all capitalists, is undergoing moral turpitude: "take the money and run" has replaced the old fashioned corny "do the right thing".

2) Please talk about the BoJ's assessment of the economy on Friday, and where Japan is heading.

• It is striking is that the BoJ is looking from the bottom of a glass that is half empty and saying that it is half empty.
  • First, it says that the deterioration in economic conditions is likely to moderate gradually.
  • Secondly, it points to the build up of inventories - but not of domestic demand - as being a key engine of production.
  • Thirdly, it emphasises that any economic revival carries huge downside risk AND that domestic private domestic demand will keep weakening.
  • Fourthly, it may have blurted something about "improved corporate access to credit"; however, in the same exhalation, it mutters something about widening the range of collateral that it will accept from banks. Now it will accept collateral in the form of sovereign debt issued by America, Germany, the UK and France. Anyone thought through the currency risks that the BoJ is about to enter by accepting such non-yen collateral?
  • Finally, the PM Aso'/s government is pushing through Parliament a stimulus package worth 5% of GDP. And the BoJ is giving us a clean bill of health? No, it is talking - up a bad story!

3) Is the worst over for the Asian economy? If so, what's driving the recovery? Which countries/markets are you bullish or bearish about?

4) We've seen a number of central banks pausing in their monetary easing. Your thoughts? (Malaysia and the Philippine central banks are holding rate review meetings this week.)

• No full views here, except that like everywhere else: just how much easing can you do before the motor starts to ignite?
• I hardly think that nations really want competitive devaluations of their currencies, as this will stoke trade wars (see my latest book on how American multinationals create America's global trade surplus of U$3 Trillion). But expect "host country protectionism" to set in, whereby the local operations of foreign MNCs are threatened by local governments. Witness what may have happened in Latin America recently to the local operations of Pfizer (PFE) and Cargill!
• Besides, competitive devaluations will stoke stagflation by further inflating import prices (these countries have to pay more local currency for their imports from abroad).

5) In view of your economic assessment, what do you recommend investors do? Where should they put their money?

• We have suggested gold and the A$ as safe havens, as we don't believe in the moral strength of US dollars nor in US debt: recent news on how Wall Street has feathered its nest stinks of moral turpitude.

6) Are there other issues or concerns that you would like to highlight?

• If all of these green shoots are around, then why do governments k eep easing monetarily and stimulating fiscally?