Are U.S. inflation jitters worrying you?
• We have been worried for some months about America’s inflation pressures.
• But contrary to the market, our concern has been that of cost-push, NOT of demand-pull inflation:
o Washington’s gripe is Main Street’s delight: America’s trade deficit is worsened by cheap imports from China and India
o But, productivity is sagging, and wages are rising, so up go unit labor costs (ULCs)
o This rise in ULCs is going to bite profits whichever you look
+ EITHER the companies pass the higher input costs on – so up go the Fed Funds rates and slow demand even more, next to exacerbating the sub-prime issues, so down goes demand and thus the turnover part of the profits equation,
+ OR companies do not pass the higher costs on – at which point the margins part of the profits equation gets squeezed
o If it is true that stocks, ultimately, are bought and sold because of their profits outlooks, then with the profits outlook worsening, along with America’s Economic Time™, so much the stock market.
Must a U.S. market slump by definition hurt Asia?
• Not as much as when I started my Asian career in 1986.
• At that time, everyone was obsessed with Asian exports to America: “if America sneezes, Asia catches a cold”
• Things are not “different” – but, the growth locomotives have changed: step in China and India
• While America, Europe and Japan are highly developed cyclical economies, there is a “trend” growth mandate in China and in India: politicians have to create jobs – otherwise they will be out of jobs themselves
• Thus, or guess is that once the market accepts a worsening Economic Time™ in America and Europe and Japan, all markets will undergo an initial spasm – but then watch the funds flow to the “safe havens” of China/Hong Kong and India.
• Why is this? Because these economies are far less dependent on exports to America and Europe, and far more dependent on domestic demand: so America gets to sneeze without us catching a cold!
Any important market messages that came out of Prime Minister Wen’s visit to Japan?
• Yes: both sides want to work to get along, and that is good for markets
• Crucially, the visit’s results will stand/fall by the issue of the Yasukuni Shrine visit: as long as PM Abe does NOT visit the Yasukuni Shrine while he is Prime Minister, China wants to keep talking with China about issues of mutual interest. BUT, if Abe does visit the Shrine, then watch lots of political anti-Japanese pressures mount in China. At that point, Japan’s traditionally defensive foreign policy could get teeth: it could re-arm in fear of the Chinese “dragon” getting unruly (again?)
• There is an interesting dichotomy: China’s population is growing while Japan’s is shrinking. So it seems that both sides want to maintain the peace – which is good for markets in the long term
Why are you so optimistic – despite the currency peg implying that HK rates have to go the direction of America’s?
• Hong Kong has evolved from China’s export port to China’s banker
• This means that Hong Kong is no longer as dependent on America’s and Europe’s and Japan’s Economic Time™; instead it is the water skier off the back of the Chinese (growth) speed boat
Any political reasons for concerns about the markets?
• Yes: domestic politics are very unsettled at present, and markets don’t like that
• But there are rumours that Chen wants to lob bombs at China just ahead of the Olympics – so as to spoil China’s party, say next May? We sure hope that the rumour dissipates, but it has come to our attention….
Rates just got cut again: is Thailand’s Economic Clock™ going into a better time zone?
• Sadly not
• As in Taiwan, political tensions are going to dominate market sentiment
• Indeed, the very reason that rates were cut is precisely because Thailand’s government is facing challenges. It will overcome these, but if there are so many “sure fire” investment opportunities in China, Hong Kong and India, then why risk one’s money in Thailand?
• The Kingdom will make a comeback, but the time value of money is unrelenting, and points to more promising markets for now.