Dear Investors,
First half of 2009 is coming to close and it was much better than most people anticipated, but also more volatile with the 666 low in S&P in March being the low point for many people.
I have been wrestling with some medium- and long-term macro pointers to set against my daily trading and my friend Yoshi has put some excellent views on the table for me, but from my angle I am somewhat "concerned / sceptical" on the decoupling of Asia - although I do recognize the major power shift from the US to Asia which is on going - but can the world move back into non-Global capital flow? If so what precedes it?
One recent theme I saw from Arthur Kroeber of Dragonomics was on China trying to go from labour productivity to capital productivity........meaning more efficient and open capital markets, increased foreign ownership through IPO's and bonds issuances, relaxed currency control ..........relevant?
I do not know yet, but clearly China had a Plan A, but no Plan B, now plan B seems to become to use their capital more efficiently, in other words, until this crisis "capital was something they took for granted" - now that they are spending close to 15 pc of GDP on fiscal stimulus (which will run out in 2011) they clearly have set themselves up for using the capital differently and more efficiently.
The problem is the old physics theorem of: An action creates a reaction, in this case...if China wants to use capital more efficiently they need to open their markets - something which ALL of the emerging markets need to do to go the next "efficient frontier".....this is no easy task especially in Asia where Governments are still recovering politically from the Asian currency crisis of the 1990s - but I expect many of the deals being done behind the scenes to have been done in the "name of the above change" - if you from a game theory perspective look at being an Asian investor with the above goal, then a few things springs to mind:
- You need to align the regions currencies closer - something I have written about extensively and China is now actively and openly persuing this policy. This means more open access but also lower trade barriers - a net net positive for growth in Asia.
- Capital markets. In order to replace a US market you need to have bigger capital markets - this means increased IPO and debt issuances on the international market........
- Capitel efficiency. How effective long-term is it to maintain and pay for the US Consumer - if you are Labuor Efficient - then it makes ALL the sense in the world, but when your focus changes, you does you willingness and ability to recycle surplus' to the US - hence we will see less and less investment in the US, which will ultimately lead US Dollar much lower and US interest much higher - DO NOT IGNORE this natural gravity of the market as it may be the strongest "slow" theme going on in the market..........
- Demographics and real estate. Both are bid to the hill in Asia in this scenario - if international investors freely gets to convert their profit & investment - something totally controlled by governments right now, then real estate should take of in Asia - also the demographics are so strong that it is a book in itself (rising middle class, rising education level, increased meat consumption etc.. )
The Hail Mary is ALSO the overall risk to above scenario - the US administration is not stupid, only wrong, so there is so many behind the scenes things going on trying to secure long-term debt financing.........
Well this became a bit long-haired - forgive me, but it may be the most important blog from me this year, as it certainly got myself thinking. I have enclosed a few charts which shows part- or the whole of this reasoning.
Table 1: Fed balance sheet has stabilized: Means now the administration can start looking at the above issues of long-term financing and what they believe is the "exit strategy" - I call it the Hail Marry project.
Table 2: Courtesy of my friends in BoA - this shows clearly how the potential
for de-coupling is happening - mainly in risk taking environment ...
Table 3: As the world normalize - the inflation expectactions dictates the US Dollars
future - right now it looks like our expected inflation is again coming in...
Table 4: From IMF latest report - this charts clearly shows how the US is lagging, and NOT coming back, while the rest of world and EMG performs again...
STRATEGY:
FX: Short EURUSD - as above inflation expectations down = stronger US Dollar - also there is almost competition from other central banks in the G-10 to tell the world their currencies are overvalued (NZD, GBP, AUD, partly EUR, CAD.....)
FI: Neutral - adding risk tomorrow..
COM: Short crude and Gold.... http://www.marketwatch.com/story/iea-revises-down-global-oil-demand-forecast
EQUITY: Short S and P...
Safe trading,
Steen
