World Economic Outlook: Beware the Ides of March

Highlights from appearance on Bloomberg Television UK and Deutschland:

Worsening of the global Economic Time®: US, EU and Japan

- So, bad markets stay with us:

1. Global time has been worsening since April 06, So the US market has risen only 7%, Japan: -4%, and Europe + 6%. Lots of work to achieve such skimpy returns!

2. US: profits must fall with unit labor costs rising: either firms pass the cost push inflation on, so the Fed tightens more, OR they absorb these higher unit labor costs – but that cramps their margins. Fed wants to do the dirty work way ahead of the elections, so fed funds rise until4Q07

3. America’s sub prime mortgages may be the Russian debt default in August 1998 – after which the yen carry trades were unwound and so the yen shot up by 41% within a year! Key is that carry trades will be unwound – the nightmare scenario is a hedge fund with a carry trade that is financing sub prime mortgage credit default swaps!

4. In Japan and Europe, the monetary data are contracting, so that is withdrawing liquidity. And in Japan, the grey haired retirees (8 million collect Yen 50,000 billion pension payouts within 3 years) will keep buying higher yielding offshore assets

5. Protectionism on Capitol Hill: China is “for free,” so protectionist Pelosi will lead the charge. Bush cannot stop this China bashing thanks to his Iraq ego trip

6. “Sevens” - Big market crashes in 1927, 1987 and 1997.

Impact of rate increases in Europe

- The objective is to change The Economic Time® in Europe – from an excess demand for goods, to an excess supply of goods. That is being done by creating an excess demand for money – by hiking rates

- The European rates will keep rising longer than America’s, making the Euro an attractive currency to buy because of interest rate differentials

Paulson: asking China to open

- Yes, and this is good

- He also wants to avert protectionism on Capitol Hill

- But, I think that China – along with the rest of the world – is getting tired of American lecturing the whole time. In China, Paulson was even telling Europe to reform its labour laws and Japan to open up more…

- The simple fact is that globalisation has left trade balances behind. Half of China’s trade surplus is because of Multinationals operating in China and selling abroad. Were there NO multis, then China would have to import everything – and that would create a trade deficit of USD 400 bn!!

- All politics are local – also in China. They will do what they want. They do not have the legal infrastructure to deepen their capital markets yet

China’s NPC

- The only points of interest: will they enshrine property rights and change the household registration system?

- Otherwise: with a leadership re-shuffle this October, don’t expect any fireworks from the NPC