America's Stagflation and How It Affects China

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Includes: EWH, FXI, GXC, PGJ, SPY
by: Enzio von Pfeil

Notes from Dr. Enzio von Pfeil's upcoming appearance on Bloomberg Television Deutschland:

1. Will global market volatility stay on?

· Most definitely.

i. Curiously, many analysts at top investment banks still are chasing the illusion that U.S. corporate profits will rise by 15% this year. Hardly so: America’s Economic Time is worsening, and previous research shows that her current fight with an “excess demand for money” will depress the stock market by about 50%. At this stage, we are only 13% off the peak.

ii. Even if some U.S. banks have had to come clean – how about the foreign ones? They are being dragged out of the closet unwillingly, witness recent news on “safe” Swissies like UBS (NYSE:UBS) and Credit Suisse (NYSE:CS), then there is ANZ and of course that old German donkey, IKB.

iii. Finally, if the outlook is so rosy, then why is the Fed slashing rates, Bush and Congress passing stimulus packages and even the IMF getting worried?

2. What can Beijing do about China’s inflation?

  • Not much by way of monetary policy. Indeed, we currently are witnessing cost-push inflation, one fuelled by a government not really in charge, bad weather and Dickensian mining practices.
  • None of this can be addressed by monetary or indeed fiscal measures.
  • Mentally go to South Africa for a moment. Their electricity supplier, Eskom, is providing 10% less electricity to the mines. So down goes platinum production, and up goes the platinum price. Can a Central Bank remedy this problem? Hardly. The parallel works with China.
  • Instead, Beijing increasingly will have to take administrative measures as it already has concerning fuel prices.

3. What does The Economic Time™ in America have to do with Asia?

  • We have warned of U.S. stagflation since May, 2006. Cost-push inflation, coupled with banks that have to clean-up their balance sheets, equals rising prices AND no growth.
  • We never have believed in the de-coupling myth:
    • First, with The Economic Time worsening in America, her import demand wanes, and of course this affects China-based exporters
    • Secondly, the psychological effects of a falling U.S. market never should be underestimated. For all of this hype about China being the next “superpower”: New York will remain a far stronger and influential stock market than Shanghai’s ever can for many years!

4. Is The Economic Clock™ getting better or worse in Australia?

  • It should be improving: China’s demand for commodities is a “trend” story, and Australia is a natural beneficiary
  • Of course, this implies ever-higher Australian interest rates: the Central Bank will want to keep creating an excess demand for money in order to pave the way for an excess supply of goods, and thus for a downturn in Australia’s demand-pull inflation

5. Hong Kong’s market prospects?

  • Tough one to call.
  • The Economic Time is worsening globally, particularly with stagflation on the cards in America.
  • That sentiment will keep weighing on markets, particularly once all of the recent measures have run their course. So, earnings prospects wilt and markets get re-valued – actually, de-valued on account of worsening earnings prospects.
  • So, investor psychology sours, and that will keep affecting us here
  • The only ray of hope is the upper-end property market: there is so much mainland money frightened of its own banking system that it will keep looking for a home outside of Chinese banks. Gold and property are favourites in the East.

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