Current Global Market Worries Are Justified

Includes: EWJ, FXI, IEV, IOO, SPY
by: Enzio von Pfeil

Notes from my recent appearance on Bloomberg TV Hong Kong and Germany.


Are current market worries justified – or just emotional?

• For far too long we have been warning that The Economic Time ™ is worsening in America, but also in Japan and in Europe. In simple talk: the Central Banks are creating an excess demand for money, and for good reason: inflationary pressures are looming.
• Central Banks tighten precisely because they want the economy to slow down!
• And they stop tightening for an equally good reason: they figure that, in the jargon of our Economic Clock®, the “excess demand for goods” which was fanning inflation is waning, and that this is morphing into an “excess supply of goods.”
• If you agree with this simple logic – then why on earth would people buy stocks knowing that demand either has to be curtailed via further tightening, or that it is set to slow? In either case, the turnover portion of the profits equation gets squeezed, so down go corporate profits!


So where do you see inflation?

• We believe that there is pronounced cost push inflation, which could end up in stagflation next year:

o Productivity is falling while
o Labor costs are rising , so
o Unit labor costs are rising

• Of course, rising oil prices off the risk of a block Straits of Hormuz don’t help, either

How could rising ULCs affect profits?

• If corporates pass the higher ULCs on, then the Fed tightens even more – ultimately crimping turnover, or
• If corporates do not pass these higher ULCs on, then their margins get hurt immediately.


What does this nervousness have to do with a rising yen?

• When people do a “carry trade,” they borrow yen and sell it in order to buy a higher yielding asset, e.g. Australian bonds
• So when they get nervous about the global Economic Time, they start selling such non-yen assets and buy yen and re-[au the loans
• We pity the bright sparks who did the “yen drop” trade: borrow yen and invest in high yielding sub-prime mortgage derivatives!


So if the US and Europe stumble, who gets hurt in Asia?

• The small, open and export-dependent markets, especially Singapore
• Japan, I never have liked on account of Central Bank tightening
• China and India live under the yoke of a growth mandate, so even if the US slows, they cannot – unless the governments want the unemployed to bellow
• Hong Kong is the water skier off the back of the Chinese speed boat: our growth (and our lungs!) is (are) linked to China


Your view on China’s Property Law passed at the NPC on 16th March?

• I am all for it: in typical Chinese pragmatism, Beijing has realized that it must keep the growing middle class politically on-side – all the more in that the private sector accounts for 2/3 of GDP, and private sector fixed assets investments (such as machinery and factory buildings) nearly tripled from 2000 – 2005
• Of course it is not perfect. One bright economist calls this China’s Property “Flaw” – inter alia, because farmers still cannot use their rural land as collateral against which to borrow.
• But my point is that private ownership – of homes, of cars – breeds a “rule of law” mentality: after all, if someone has damaged your private property, why should he/she not pay for it? That question never arises if the State (or indeed the firm!) is paying
• One upshot: the rise of the middle classes will give rise to China’s “Gucci Dole”- what you see so much in Hong Kong: rich parents pampering their un-industrious spoilt brats – just like the state pampers people who don’t want to work in Europe!