Asian Outlook: Coping with U.S. Stagflation

Notes from Dr. Enzio von Pfeil's recent appearance on Channel News Asia:

1. Dr. Enzio, you believe the US economy is going into stagflation but not everyone is buying the stagflation scenario. Why do you say the US is heading into stagflation?

• The Economic Time™ in America has been worsening since we “called” stagflation in May of 2006

• “Stag” stands for stagnation, i.e. no growth; AND "flation" stands for "rising (cost-push) inflation

• Monetary Economy. It is being destroyed by the sub-prime mess: that is creating an excess demand for money. This is a credit recession in which banks do not want to lend

• Thus, The Economic Clock™ is pointing to an excess demand for money in America

• Real Economy. That unwillingness to lend, coupled with huge foreclosures on private as well as commercial banks means that consumers are leery of spending: they are tightening their belts

• Thus, The Economic Clock is pointing to an excess supply of goods

1a. Prolonged or short-term stagflation? Are we seeing a return to The Great Stagflation of the 1970s?

• Prolonged

• Dr. Bernanke was on TV on Wednesday, and President Bush was on TV yesterday warning of the gravity of America's economic slowdown

• When Germany and Japan went through this cleansing of their balance sheets, it took nearly five years and the markets fell by about 40%

• Raw commodities' prices, a form of cost-push inflation, will keep rising now that new kids - China and India - are on the block. The last time around they were not commodity players

• Finally, the U.S. Congress wanted a lower dollar. Well, it got one. One result is that Americans have to pay more dollars per unit of import denominated in foreign currency, so up goes imported inflation.

2. You have said Asia will not be spared from the fallout. In fact, we are seeing rising inflation across the region right now. Both Singapore and Hong Kong have dished out goodies to help their population to cope with rising costs. What else can be done to counter the effects of inflation?

• We never bought the juvenile notion that things are "different" this time, or that the economies have "de-coupled" from America's

• Both budgets - those of Hong Kong and Singapore - are consumer-friendly

• This stagflation allows for no quick fix.

• Both countries must keep enhancing their competitiveness through educational and environmental policy, for instance. That keeps these two countries attractive as investment destinations

• Strong currencies will keep their import costs low. Singapore is at an advantage here compared to us in Hong Kong

3. Which Asian economies will be hit hardest?

• We in Hong Kong as we have a pegged currency, so up goes imported inflation, and we are very dependent on U.S. trade

• Southeast Asians - particularly Thailand and Malaysia - on account of political wobbles making themselves felt

4. Still, are you positive on the longer-term outlook for Asia?

• Totally: the Chinese work ethic will prevail, as will Chinese pragmatism

• Besides, India and China have political mandates to grow

• Finally, everyone out here wants success: New Zealand's, England's and Germany's "tall poppy" disease - whereby the losers envy the winners - has not set in!

Comments

[johnthebear]

Agree with your premise of prolonged market downturn and recession, world wide. China and India will fare better than US and Europe. However, China has excess industrial capacity and any slowdown in sales to US and Europe will result in unemployment and stress in their economy and sharply reduced stock prices due to excess capacity as well as real estate inflation both commercial and residential, so they too are likely to have stagflation. (Cap rates in England got as low as 4.5%, less than mortgage rates!) Germany unemployment has finally fallen to 7.1% down from 14% a couple of years ago, but that will likely reverse.

As our dollar declines and our exports to Europe increase, sales by Europe companies will decline, resulting in lower profits, rising unemployment and inflation, just as here in the USA.

So, in my judgment look for continued sell off in the stock indexes all over the world. Even Brazil and Mexico are in a downtrend below their 200 day moving average. I follow China using FXI which is already down sharply from the 221 high to the current 145 level. I expect a sharp selloff all through 2008. The market in FXI and EEM will likely recover much faster than US market but only after a sharp sustained decline. So I bought out money puts in FXI and EEM. I also have invested in GLD and SRS to try to survive the downturn.

The subprime mortgage resets will reach their max this month. Possibly $600 billion is expected to be lost by banks world wide due to subprime and CDOs. Ben said there will be bank failures, and I believe him. Lets pray it is not C or BAC. This thing is really getting bad regardless of what the Goldylocks crowd would have you believe.

Economic and political stability in China will be threatened by the huge inflation in food prices and shortages which have already led to riots. Troops were called out to maintain order due to shortages during the recent snow crisis. No, it will not be easy anywhere in the world. We will have a crisis of deflation in real estate and inflation in energy, food and everything else we need.