Outlook: Going Bear
This entry was posted on 11/11/2009 3:27 PM and is filed under uncategorized.
Emerging Market Strategies
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November 2009
Going over to the Dark Side
Earlier this year I was very optimistic about the recovery and the economy. The combination of free money and cheap energy seemed irresistible. My view was that the equity rally would proceed well into the fall and perhaps into 20101. I scoffed at the sell in May people, the dire predictions about market corrections in September or October and the terrible double dip. Things change. There are now certain imbalances in the global economic system that I believe will result in trouble. I have no doubt about the eventual recovery, but for now there is every reason for caution.
Last week we saw what looked like an improving economy. I doubt it. There are three big problems, which I believe will slow the recovery and result in falls in most equity markets around the world.
The first is unemployment in the US. A 10% unemployment rate means slow or no growth in an economy that is 70% grounded in consumer spending. End of story. I realize that perhaps the rise in unemployment is slowing, but it is still rising. Until that trend reverses, which probably won’t happen until next summer, the US economy will not grow rapidly. The US economy did grow by 3.5% which was great, but if you get inside that number much of it had to do with government stimulus packages, which have to paid for and are not sustainable.
The second problem is China. Chinese banks dumped $1.2 trillion into its economy. It worked. The economy is growing at 8% and that growth sucked in commodities from all over the world. It saved the Brazilian and Australian economies, pumped up their currencies and led to real estate booms in Singapore, Shanghai and Hong Kong. The money also went to the wrong place.
It went to state owned industries that will never pay it back and will not create jobs. Why hire anyone if capital is free? The state sector not only is the least efficient part of the Chinese economy, the overinvestment is creating trade tensions between almost every other country and China. The protectionist trend in world trade will slow the recovery. It will end in tears.
The Chinese banks do not have unlimited funds. The state owned industries cannot keep producing stuff that no one buys. Unemployed Americans can’t spend on anything and Chinese consumers without health care or public education won’t. So eventually the Chinese banks will have to tighten lending. It will substantially slow growth not only in China but also across East Asia and commodity driven economies like Brazil. It will also dent the appetite for risk, which will affect the third issue. Societe Generale strategist Albert Edwards was quoted in Hong Kong as saying that “he expected that at some point China would go into recession, calling people's excessive faith in growth stories a "sick joke."”
The third issue is the carry trade. Speculators around the world have taken advantage of huge amounts of basically free money to pump up every risky asset class from emerging market equities, to commodities to gold and even US equities. All of this speculation is tied to the dollar. When the dollar rises, which it eventually has to, this house of card is going to have to be unwound. There are several emerging markets specifically Brazil and India that are way over bought. The price of gold should come down along with the price of oil. Without sustainable economic growth in sight, the US equity markets will not be able to sustain the present rally.
Many investors have put their faith in the US’s ability to create ever larger deficits and the Chinese to encourage a continuous stream of new lending. Not so. All good things must come to an end. There simply isn’t any money.
The House just passed the health care bill. As a student of law and economics and hopefully to help me get a job, I am analyzing the bill. So far I have found nothing in the bill that might bring health care spending, which is already almost 20% of GDP, under control. What I have found are the probability of a huge amount of new government spending. With two wars and the potential for vast new government spending on health care, the US well will finally have gone dry.
“The IMF projected that on current trends; even assuming some discretionary fiscal tightening next year, government debt in the advanced G20 economies would reach 118 per cent of gross domestic product in 2014.” According to the IMF, “Sweeping spending cuts and tax increases will be required across the industrialized world over the next decade to bring public finances under control following the economic crisis”
William Gamble, Your Globalized Lawyer
Practicing law in countries that don’t have any
EMERGING MARKET STRATEGIES
3704 N. Charles Street Apt. 1106
Baltimore, MD 21218
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
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