GREED & fear - Talking points

A  further  melt  up  remains  the most likely end to 2009. The
     equity  markets’  resilience  has  been further demonstrated over the past
     week with the mini panic over Dubai. The whole episode serves as a further
     reminder  of  how investors are prone to panic when debts they presume are
     government  guaranteed are in fact not so. There is certainly no reason to
     assume that Dubai World is government guaranteed.


     ·         If the credit multiplier does pick up in America, then the trade
     in  Asia  becomes  to  buy  Asian  exporters  and  in  particular Japanese
     exporters  given  that a healthy US economy means a fundamentally stronger
     US  dollar  since  the  foreign  exchange market will be quick to discount
     higher  US  interest rates. Still GREED & fear’s base case remains to wait
     for  hard  evidence that releveraging is occurring before assuming it will
     happen and adjusting portfolios accordingly.


     ·          It is certainly wrong to assume that all of the upside has been
     discounted for Asia and emerging markets, however consensus has become the
     view  that  Asia and emerging markets are the best place to be. Even after
     the  remarkable  performance  seen this year, most emerging markets remain
     well below their pre financial crisis highs.


     ·          GREED  & fear’s view remains that emerging markets will surpass
     their  pre-crisis  dollar highs sooner or later. But the guess is that one
     big  correction  lies between then and now, and during that correction the
     US  dollar  will rally on the deleveraging trade and the oil-led commodity
     complex will correct.


     ·          The best stress test for any potential Asian resilience remains
     a S&P500 correction, in terms of how Asia performs in any such correction.
     It remains much more likely in the short term that the S&P500 will correct
     because  of  monetary tightening concerns than because of concerns about a
     “liquidity  trap”. A further spike in oil remains to GREED & fear the most
     plausible near term catalyst for a correction.


     ·          The  intensifying  deflationary  pressures  in  Japan  have now
     finally   triggered   a   reaction   leading   to  this  week’s  emergency
     “unscheduled”  Bank  of  Japan  monetary policy meeting. But the BoJ again
     managed  to disappoint expectations when the market probably wanted to see
     a big increase announced in quantitative easing.


     ·          What  the  BoJ really needs to do is to convince investors that
     the  yen should once again become the funding currency of choice for carry
     traders and not the US dollar. For a weaker yen remains the most effective
     way   of   combating  the  intensifying  deflationary  pressures  quickly.
     Unfortunately,  the  BoJ  does not have the necessary skill set to achieve
     this  which  is  why  the  best hope for the Japanese stock market is that
     monetary policy gets traction in America and US dollar short term interest
     rates normalise.


     ·          GREED  &  fear  remains  of  the  view  that  investors  should
     overweight  both  Chinese  banks  and  property stocks. The bounce back in
     China  bank  stocks this week after last week’s capital raising scare is a
     positive.  As  regards  property,  real interest rates should decline next
     year  in China since the pick up in inflation is likely to be greater than
     the pick up in nominal interest rates.


     ·          It  is  most  unlikely  that  the PRC will tighten aggressively
     towards the property sector given that a new land development cycle is one
     important  way  the  Chinese  government  hopes to meet its 8% plus growth
     target  next  year  without  too  great  a  reliance  on  SOE  fixed asset
     investment.


     ·          The  obviously most vulnerable area where similar debt concerns
     like  Dubai  could  suddenly  shock  markets  remains  the fringe parts of
     Europe. The PIIGS spread has begun rising again in recent weeks, while the
     CDS spreads on the weak underbelly of Euroland have also been rising again
     with Greece leading the march upwards.


     ·          Fortress  Euroland  has  so far withstood the pressures of last
     year’s global financial crisis. But in GREED & fear’s view it is premature
     to  declare  victory.  The  Baltic  States remain a high stress zone going
     through  dramatic  GDP  contractions.  While as with Abu Dhabi, it remains
     unclear if Germany is really willing to bail out the PIIGS 100 percents on
     the dollar if government debt concerns come to a head.


     ·          The  euro  is  now supremely overvalued to the benefit of Asian
     exporters  to  the  Euroland  region.  Clearly,  the  euro  can  get  more
     overvalued  so long as the rally in risk assets continues funded by the US
     dollar  carry  trade.  That  means mounting pressure which Euroland can do
     little  about  given  its  complete  lack  of credibility at the political
     level.


     ·          With  the  Copenhagen climate summit pending, if Obama wants to
     seize the initiative on the economy and create an unnecessary capex cycle,
     he needs to demand that corporate America becomes carbon compliant!

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