Which Asset Classes Should Investors Choose?

Includes: FXI, PGJ
by: Enzio von Pfeil

Some notes from Dr. Enzio von Pfeil's August 12, 2008, appearance on CNBC Asia:

  1. You were bullish about commodities the last few times when you were on the show. What do you think of the current pullback in commodities? Is the boom over? Or is this a good opportunity to buy?
    • The current pullback has everything to do with a stronger dollar: when it rises, commodities fall.
    • The market chatter about “waning global demand” is not to be over-rated: OPEC, the sun and the wind can dictate supply any time that they wish to. As could an Israeli attack on Iran…
    • Thus, my guess is that as long as the dollar stays strong, commodities keep weakening. And once the dollar falls, watch the very same, sagacious people piling back into commodities!
    • The demand factor that is NOT going down are growth Diktats in India and in China…and Americans will NOT just relinquish their big shiny cars – I lived there too long to know that a big car belongs in a big country…
    • So while one may wish to downsize the commodities weightings, give them up totally at your pecuniary peril!
  2. Based on newsflows these past weeks, the U.S. credit crisis seems be far from over. What do you think? How will the situation in the U.S. affect Asian economies and markets?
    • I fully agree: the credit crises are set to worsen. (I am deliberately plural in “crises”: markets are focusing too singularly on sub-prime messes; how about the coming credit card crunch?)
    • The next big concern has to be the “independence” of the Fed, now that it is bailing out all of those well-paid investment bankers…
    • The credit crises, in conjunction with the Fed being more worried about falling growth than it is about rising prices, implies that US rates have to stay low for a long time – throughout this bout of stagflation.
    • This suggests that any economies pegged to the dollar will face more imported inflation, once the dollar heads south yet again…
  3. Which Asian economies are in trouble? Which will stay resilient?
    • The most vulnerable ones are those undergoing political turbulence, particularly
      • Malaysia, on account of Anwar
      • Thailand, on account of Thaksin, etc.,
      • Korea, on account of a weak PM, and
      • Japan, on account of an atrociously weak PM.
    • The Economic Time™ is set to worsen, particularly in those economies whose currencies are pegged to the US dollar, i.e. Hong Kong: a stronger dollar will hurt their exports; a weaker one will fan imported inflation.
    • We have called stagflation since 2006, so the fact that global Economic Time™ keeps worsening does not surprise us.
    • Curiously, the very strong political mandates to create domestic employment are most virulent in China and in India, and this is why I am not overly concerned about the Economic Clocks™ of these countries
  4. Let's talk about China, which is hosting the Olympic Games in Beijing - what are your views on its economy and markets?
    • Economy ok; market not so ok.
    • Economy:
      • Very strong growth mandate as in: Beijing has to create 10 MILLION jobs a year just to stand still
      • Thus, typical Chinese pragmatism rules.
      • But do watch out for a post-Olympics hangover: this has happened to each economy once the locker rooms have emptied…
    • Markets:
      • Not ok.
      • The key is that market de-coupling is a myth: if America sneezes, we all catch cold.
      • This is one reason why China’s stock markets are struggling, despite having had the “earnings luxury” of the Olympics.
  5. What investment strategy would you recommend in view of the current global outlook?
    • I am a strategic, not a trading investor.
    • Our funds remain long of commodities and of an Olympics play.
    • But this has everything to do with market sentiment surrounding the dollar: a strong dollar begets strong stock markets, and as markets are NOT de-coupled from each other, up all of them will go.
    • But once punters sell dollars, watch commodities rise again – for the same reason that they rose before: they are a great dollar hedge, and are driven more by supply than they are by demand factors.
    • Of course, a falling dollar will beget falling stock markets yet again.
  6. Where should investors put their money - are there any good opportunities out there?
    • See my responses just now, please.
  7. Other trends and concerns that you like to highlight
    • One is the avariciousness of some Chief Economists/Strategists: they have lost institutional and retail investors trillions through their deliberate lying.
      • One would have to have been blind not to see recession/stagflation coming as of 2006/7: where were all of these “smart guys” then? I suspect that their props desks told them what to say – by threatening their jobs and bonuses.
      • If the independence of the Fed is compromised, watch another nail in the coffin of the dollar emerge: superpower currencies always fail.
      • Stagflation is here to stay, so anyone banking on higher Fed Funds may be in for a rude shock. Indeed, the Fed’s actions of late reveal that it is more concerned about growth than about inflation. Remember that the Fed – contrary to the ECB – has a mandate to protect both variables.