Will America's Subprime Woes Ultimately Hurt Asia?

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

Notes from Enzio's recent appearance on CNBC:

How investors may be behaving going forward

· Background: for a long time we have been telling our clients that The Economic Time™ in America is worsening. We thus have been wrong for along time in telling them to not invest in America, but in other places where The Economic Clock™ is signaling good buying opportunities.

· Thus, the recent shakeout in America is of no surprise to us. As one of your American squawk box commentators magnanimously observed about himself, he has called six of the last two US market crashes! So have I. Let's hope that I am right this time around.

· What is “different” this time is how deeply the sub-prime [SP] news has embedded itself into investors’ consciousness: a lemming effect is taking place

· Sadly, once the herd is shaken and turns, and the longer that it has turned, the more that momentum picks up in that direction

· Thus, a bear market in America has just begun.

· Prof. Kindleberger wrote a marvelous anatomy of a crisis.

· America has gone through the displacement and boom phases and now has entered its Distress phase (contrary to the false alarm this February, when people panicked – but loaded back up!)

· Having been in broking for over 20 years, I would not be so naïve as to say that “this time it’s different”: America still dictates the world, whether it be politically (witness the Muddle East), economically, or indeed via its stock markets.

· However, I would say that increasingly, investors worldwide are being given greater choices. As I note in my forthcoming book,

o America’s stock market capitalization of $16 trillion in 2005 is still bigger than that of Europe’s, Japan’s, the UK’s and China’s combined market caps. In August 2007, America’s, market cap of $18 trillion was 6.4x bigger than China’s total market cap of $2.8 trillion, and

o America’s domestic bond market cap of $22 trillion also is bigger than Europe’s, Japan’s, the UK’s and Switzerland’s combined!

· However, especially Asia and Latin America are becoming investment alternatives. Particularly China, who is undergoing her first industrial revolution – whereby people are leaving the farm for the factory. This prompted famous fund manager Jim Rogers recently in our South China Morning Post of 4th August to assert that “’fantastic fortunes will be made in the country”.

· So what I mean is that The Economic Time is great particularly in Greater China and other parts of Asia.

· So my guess is that Asian markets will flourish once the US SP dust settles, and the American market is properly lodged in the fourth Kindleberger phase, “Panic”. Jim Rogers also cautions on the US, stating that “this is one of the biggest bubbles we’ve had in credit”.

How justified the fear of buying into debt is with the sub-prime mess and the exposure of Asian institutions?

· Totally justified

o Last week alone the SP news wiped $2.1 trillion, or 12% off America’s market cap of $17.99 trillion. If you annualise 12% per week over one year, or 52 weeks, that would have translated into an annualised loss of 300%: America’s market cap would have been decimated threefold!!

o Last week we also read that

- America’s 10th biggest home lender, American Home Mortgage, is planning to close

- Many big name hedge funds are closing, e.g. two at Bear Stearns. Others have suspended redemptions. Redemption pressure means that the hedge funds operating in this loosely-regulated $1.75 trillion industry have to double-check their performance data more carefully, possibly delaying their release

· So I am with Jim Rogers: this time around, the SP news is the beginning of the end concerning America’s stock markets and thus credit will keep tightening creating a terrible Economic Time for America, namely an

o Excess demand for money (tighter credit: banks don’t want to lend even to healthy borrowers), and an

o Excess supply of goods

· Concerning the exposure of Asian institutions to America’s SP mess

o According to the South China Morning Post of 4th August, p. B5, top ratings agencies Moody’s and Standard & Poor’s stated that

- Asian banks have learned from the 1997 crises out here, so

- the impact of the SP meltdown on Asian banks & insurers and would be limited

- Japanese banks have SP exposure of US$ 8 billion, and Taiwanese banks have even less exposure.