What US Stagflation Means for Asian Markets

Includes: EWJ, FXI, PGJ
by: Enzio von Pfeil

Excerpts from Dr. Enzio von Pfeil's appearance on CNBC:

  1. With talk of a looming recession in the US, how are Asian economies dealing with this? Is decoupling happening?
    • Decoupling is wishful thinking; re-coupling is what is happening. Things just are not so 'different' this time around!
    • On a psychological level, when the U.S. market tumbles, everyone around the world gets nervous - all the more so with the internet now welding everyone's market knowledge together. This nervousness translates into a dampened shopping mood, which stems primarily from the female subconscious.
    • On a real economy level, when the U.S. consumer tightens her belt, exports from Asia slow down. So those people previously employed in Asian exporting jobs get laid off. So their consumption falls. This dampened consumption now starts affecting domestic demand and the jobs of people employed in 'domestic' industries producing goods and services for purely domestic consumption.
    • Of course, multinational companies (MNCs) headquartered in America will find their global earnings less savaged than those U.S. companies producing solely for the domestic, American market. However, the lagged effects of the psychological and real economy that I just outlined will translate into lower global MNC earnings later on. The slowdown just gets a longer 'tail.'
  2. Are Asian exports turning their attention to other economies like China to offset a US slowdown?
    • Yes, but don't expect fireworks.
    • Take Japan. While she is trying to sell more to China, the nature of what she sells - highly sophisticated machinery - is in less demand, given the psychological and real economy re-coupling that I referred to just now.
    • Don't over-value the power of exports in any one economy! Generally, countries have to import components and machinery in order to export, suggesting that the net trade balance equates to a mere three per cent of GDP!
  3. Where do you see strengths in Asian economies for the rest of 2008? Where do you see weaknesses?
    • Strengths:
      • Weak dollar-linked exchange rates may buttress price competitiveness.
      • A clear, political mandate to grow - especially in China and in India.
    • Weaknesses:
      • A non-functioning banking and legal system in China, making one question the purported 'strength' of the RMB.
      • Political vulnerabilities stemming from rising food prices - particularly in Southeast Asia.
      • U.S. stagflation is not being factored into market ebullience - yet...
  4. Regarding the FOMC meeting on Apr 29-30: Do you expect a further rate cut?
    • I would have thought so. Particularly during this election year politicians will pressure the Fed to keep cutting rates in order to keep the current recession from deepening too much.
    • However, if my view of stagflation holds true, then the Fed will be in a tough policy bind later on this year, once the effects of a weaker dollar and rising commodity prices ripple through the U.S. economy.
  5. What are your expectations for the US Q1 GDP data due out on Wednesday? How sharp of a slowdown do you expect?
    • I am no longer in the numbers game, but I expect the data to be particularly weak due to the sagging stock market and slumping housing market taking their tolls on consumer sentiment - which is very much driven by women!
    • We have suggested since 2006 that the U.S. will undergo stagflation.
    • I expect America's stagflation to last about two years, until 2009.
  6. RBI, BOJ, Bank Negara Malaysia also have policy decisions out next week: How will Asian banks react to the global slowdown?
    • Japan: expect another round of the decade-long "let's see how developments unfold" lethargy.
    • Malaysia: It may have to cut rates due to tension surrounding PM Badawi's politics.
  7. Any other topics you want to focus on?
    • Bank of America's results, released on April 21st, illustrate how the sub-prime mess of 'monetary economy' banking problems now are morphing into 'real economy' banking problems such as rising credit card delinquencies.
    • All of this reinforces our view that when Central Banks stop lending, their mindset is totally different than when commercial (incl. investment) banks stop lending. The former focus on policy; the latter on profits.
    • This leads us to believe that America's excess demand for money will last until banks want to lend again - shall we say in 2009?