Waiting to Pounce on Asia Once the U.S. Bursts

Notes from Dr. Enzio von Pfeil’s recent appearance on CNBC Asia.

• I don’t see revised U.S. Q3 GDP changing much from the original 2.9% annual percentage change.
• But this is not the real issue. Looking backwards is infinitely less profitable than looking ahead for us investors.
• I suggest that in 2008, the U.S. will face stagflation: growth will stagnate on account of the Fed having to stop cutting rates. The Fed will have to stop cutting rates because of cost push inflation: an ever lower dollar drives up import costs, and falling productivity drives up unit labor costs. On top of which you will see the subprime crisis morph into less bank lending and that will drag down the business sector so more people get fired, particularly in the finance sector. All in all, watch The Economic Time™ worsen massively in America!

1. What are your thoughts on the recent rate cuts? Is it enough to help?
• Absolutely not.
• The key idea is that banks do not want to lend to each other, full stop. So even if rates keep getting cut by the Fed – well, that is a drop of water on a hot stone. It will be interesting to see if the recent Central Bank moves to auction off funds to the highest bidder will help. We don’t think so. The banks most in need of funds have been excluded from such auctions, as only those who are eligible for financing from the Fed’s discount window may join the auctions.

2. How well has Bernanke handled the sub prime crisis this year?
• Much better than Dr. Greenspan whose easy money policy helped create this mess.
• He has seen The Economic Clock™ in America ticking ever more loudly regarding the worsening state of affairs. And, contrary to other administration members such as Hank Paulson, he has had the intelligence and humility to listen to what non-Americans are suggesting. Thus, he took the advice of the European Central Bank and introduced one month funding auctions in America.
• But it is for the banks themselves to clean up their acts. The Fed cannot do that much, and hopefully will not bail out their greed!

3. The U.S.-Asia decoupling
• Certainly not in the short term: when America’s market cracks in 1Q08, Asia will tumble, too. Psychology is psychology, and transcends any cultural sea. People get scared when major markets crack.
• Aside from psychology, there are also the “real economy” effects to remember: if America goes into stagflation and a residential property market crisis, as Japan did in the 1990s in her commercial property sector, America’s imports from Asia must fall. That will hurt employment out here and those “pocketbook blues” will embed themselves in other sectors, too.
• Thus, things are not so "different" this time around.

4. Where will you put your money next year? What sectors are looking good?
• Currently, our Theme Fund is long commodities such as gold and oil.
• Our Economic Time Fund is long only a “short” on the U.S. market.
• Otherwise both funds are long of cash, particularly Australian dollars and Euros.
• Once the U.S. crash occurs, we will wait and then reload into Greater China, India and “glamour” stocks such as Baidu (BIDU).

5. Any other points you would like to include
• Much has been made of China’s “tightening” in order to control her “overheating”.
• We see things differently, perhaps as we are perched on her doorstep in Hong Kong:

a. Beijing does not rule China, so any idea that Beijing can control the Chinese economy is unreal
b. Beijing must keep creating 10 million jobs a year, so the idea of slowing the economy down is unreal, too. The key issue that Beijing is seeking to address is rampant property speculation. But as we just noted, Beijing’s measures must find the support of local governments, and that track record is patchy…”The sky is high and the emperor is far away…”

Comments

[johnthebear]

Unfortunately you are correct in your analysis in my judgment. The subprime issue was clearly visible in October 2006, but almost everyone except you and me and Goldman Sachs ignored the problem. I understand GS went short on mortgages, smart move.

I was shocked when I recently learned that there is a shadow banking system created by the securitization process, in which $10 million of real money supports mortgages and CDO's of $850 million. There is no regulation of this money creation. Now I understand where all the excess liquidity came from that pushed up both commercial and residential property values. Sure makes REIT's a huge risk in my judgment.

[Patrick19861]

Many people seem to be slowly embracing the stagflation thesis. I am sure with time people will also accept that decoupling is unlikely, and that China's "pocketbook blues" stems considerably from their uncontrollable inflation (Such as 49% YOY increase in pork prices).

Possible stagflation on one side of the world, borderline hyperinflation on the other side, unbelievable.