johnthebear

Asian Outlook: Coping with U.S. Stagflation

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.