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2005, year of the ... bears?
post Posted: Mar 16 2005, 06:59 AM
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Sure kura. smile.gif Looking lonely here though - doesn't look like we'll get many members by the looks of things!

Bit more to the boom counter-argument:

HD My Say: The liquidity conundrum

BY By Andy Xie
WC 1,301 words
PD 14 March 2005
SN The Edge Financial Daily
LA English
CY © 2005 The Edge Communications Sdn Bhd

Rapidly rising foreign exchange (forex) reserves in Asia, low real interest rates everywhere, declining credit spreads and market volatilities suggest ample liquidity in the global economy. However, monetary statistics in major global economies have been turning down for some time.

There are two possible explanations for the paradox. First, commodity-driven inflation is scaring investors out of money into higher-risk assets. Hence, liquidity for asset markets could be rising despite a weakening money supply. Second, despite recent deceleration, the levels of monetary aggregates are still high for the current asset prices. Both are probably relevant.

The rising appetite for risk in the global financial system is sustaining strong growth in emerging economies, which fuels commodity inflation. The latter further fans risk appetite in the developed economies through sustaining low real interest rates. As commodity inflation and risk appetite fuel each other, the global financial system sits precariously on overvalued assets. A shock would likely cause a global financial crisis.

Globalisation has altered how the global economy works. The globalisation of supply has integrated labour surplus in low-cost economies into the global economy. The neutral monetary policy should target lower inflation levels than before. Because monetary authorities have not considered this fact, they have oversupplied liquidity and created the massive global bubble.

It may be too late to prevent a global hard landing. The global economy is amid the biggest bubble in history with the most froth in big city properties (for example, New York, London and Shanghai), in my view. It is likely to end with debt deflation. The economies that have most enjoyed this bubble will likely also suffer most.

Money supplies in big developed economies, mainly the US and, to a lesser extent, the Eurozone and Japan, set the tone for liquidity conditions in emerging market economies. There are ample signs of strong global liquidity. Credit spreads and market volatilities have been setting multi-decade lows around the world. Real interest rates are still low everywhere. Property speculation — the best indicator of ample liquidity — is pervasive around the world. Last year, Asia ex-Japan saw forex reserves up by US$369 billion (or 10% of gross domestic product), the biggest increase in history, even higher than the US$310 billion increase in 2003. Asian exports, another good indicator of liquidity, have remained quite strong despite 30 months of an above 20% year-on-year growth rate — a historical record.

On the other hand, the traditional liquidity indicators in the three big economies have been turning down. US money with zero maturity grew by 3.8% last year compared with 7.3% in 2003, the Eurozone's M1 slowed to 9.3% from 10.7% in 2003, and Japan's M1 money aggregate slowed to 4% from 7.6%. The marginal changes in the main liquidity suppliers in the world were negative throughout last year.

Liquidity levels may still be too high. The levels of money supplies are still extraordinarily high in major global economies. US money with zero maturity declined from the peak of 57.2% in 2002 to 55.5% of GDP last year but is still much higher than the average of 38.2% in 1974-97. Eurozone M1 reached 38% of GDP compared with an average of 24.5% in 1991-97. Japan's M1 surged to 73.5% of GDP in 2004 from an average of 27.7% in 1980-97.

The year 1997 was a turning point in the global liquidity condition. The Asian financial crisis was a massive deflationary shock to the global economy. As China pushed investment to keep growth up in response to the crisis, the deflationary shock continued with its excess capacity formation. This deflationary pressure allowed the major global economies to keep liquidity levels high without encountering inflationary pressure.

The liquidity build-up in the three major economies (mainly in the US) sparked a property price bubble in Anglo-Saxon economies that has supported strong consumption. That consumption boom has triggered a massive export boom in China. Its boom has attracted massive inflow of hot money, which has created a huge quantity and price bubble in its property market. China's property bubble has led to strong demand for raw materials that has reflated emerging economies in general. This is essentially the global boom that we are seeing today.

We do not know how long it takes asset markets to fully reach equilibrium with the higher liquidity levels. Thus, even though the marginal changes in liquidity levels may be negative, they still could exert a positive pull on asset markets.

Money illusion drives risk appetite. Negative real interest rates are increasing risk appetite everywhere. Pension funds, insurance companies, and wealthy individuals are more willing to buy high-risk assets than before. The biggest growth areas in the global financial system are in selling derivative products to hedge funds and private banking customers to chase yield.

The perception of negative real interest rates is a form of money illusion, in my view. Commodities drive inflation at present. Unless the commodity-led inflation triggers a wage-price spiral, the inflation is not sustainable. Globalisation has created a global platform in the supply of goods and, increasingly, in services. There is still a massive labour surplus in either unskilled or educated labour in the global labour market. Any push for higher wages in developed economies would push global companies to shift more production to low-cost economies like China or India. Therefore, the current bout of negative real interest rates will not last.

The enhanced risk appetite, however, has decreased the cost of capital for businesses and economies that were starved of capital, and they have taken advantage of the cheaper capital to increase investment. This force continues to push up the prices of natural resources. The resulting inflation further increases risk appetite in the global financial system. As financial investors pile in, commodity prices rise substantially above what real demand would imply. This dynamic is leading to a big commodity bubble.

The end is debt deflation. The global economy is experiencing the biggest bubble ever. The bubble began with the Asian financial crisis and went through the tech bubble, the property bubble and, finally, the China bubble. It has been one big and long bubble. The main reason is the major central banks have been targeting inflation in a fundamentally deflationary environment, releasing too much liquidity into the global economy. How is it going to end?

There are two obvious trends in this bubble: Anglo-Saxon consumers have been borrowing a lot against their rising property values to support consumption, and Chinese companies (actually, government-related entities) have been borrowing a lot to create production capacities. To mirror the surge in liquidity, the indebtedness of Anglo-Saxon consumers and Chinese investors has risen sharply. The current boom, therefore, is debt-funded. Debt levels can continue to rise as long as asset prices keep rising.

Whatever triggers the collapse, it will show up first in declining asset prices. Property is the likely candidate. Property prices in New York, London and Shanghai could decline at the same time. When property prices begin to decline, it will cause the global economy to weaken. The weakening economy will decrease the cash flow of property speculators who will have to sell to unwind. The unwinding will lead global asset prices to collapse in general.

The major central banks may try to ease aggressively to fight the unwinding spiral. However, it would be too late to revive money demand. Most speculators who are driving demand for money today would have been cut down already. The global economy is likely to experience a period of debt deflation.

Andy Xie is a Hong Kong-based economist with Morgan Stanley

post Posted: Feb 9 2005, 08:56 AM
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After 2004 didn't think any bears would still be around, maybe those few of us still surviving should form a support group like AA " Yes, I have a problem........"

While I liked the comments from Andy Xie, I would recommend his boss (Stephen Roach ) for even more sobering comments (on Morgan Stanley website) While we are running around chasing a quick dollar, it is all too easy to loose sight of the bigger picture.

post Posted: Feb 9 2005, 01:11 AM
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Posts: 1,258

LOL Year of the ROOSTER - chinese calendar and year of the ROOSTERS NRL ! biggrin.gif

What's to crow about in Year of the Rooster?

Bullish or just plain cocky . . . the unscientific Feng Shui index points to overall gains this year but not before a mid-year correction.
The world will be transformed today as the Chinese new year ushers in the Year of the Rooster.

It's been 12 years since the cock, known for its aggressive yet inquisitive nature, graced the calendar. It was the year New York's World Trade Centre was first attacked, Boris Yeltsin crushed an armed revolt, a key piece of the World Wide Web was developed, human cells were cloned, and the ASX 200 returned almost 40 per cent.

So what insight can the Chinese calendar give investors as the sharemarket hits almost daily highs? Do forecasts using more traditional Western methods concur? And at year's end will the gyrations of the sharemarket turn the Year of the Rooster into the Year of the Feather Duster as investors are plucked?

For the past 14 years, research analyst Chris Zee and his team of soothsayers at Hong Kong brokers CLSA have compiled the tongue-in-cheek Feng Shui index.

"Some may dismiss it as pure bull," Zee says, "but in securities and investments, bullishness often pays off."

Despite its decidedly unscientific approach, the index had an uncanny hit rate last year, predicting the jump in the world oil price, the rise in transport and tourism stocks and the re-election of George Bush.

Advertisement"Every year our Feng Shui report succeeds in capturing more attention than it should, based on logic and science; but curiosity and even some superstition can sometimes overwhelm one's rational faculties. Who would not wish for a rooster as an oracle guiding one's path into the future?" Zee says.

According to Chinese wisdom, the Year of the Rooster is shaped by the forces of fire, gold and earth. Zee says fire will dominate in the first half, which is good news for telecoms, technology and utilities. In the second half, gold and earth will bring greater prosperity for both finance stocks and properties.

Still, the rooster is crowing: don't be too greedy and prepare for a bumpy ride.

"Roosters can jump but not fly," Zee says. "Take profit before an expected tumble around the middle of the year. Bottom line, the rooster crow heralds the third straight year of gains in equities."

Using Western techniques of crystal-ball gazing, sharemarket analysts and economists also see gains in the market this year, albeit less than last year's Year of the Monkey.

The head of AMP Capital Investor's investment strategy, Dr Shane Oliver, predicts a market return of about 10 per cent. From here, however, he differs from Eastern thought.

"I wouldn't put telcos up the top of the list, simply because you have the potential increase in the supply of stock [once Telstra is sold off] which will put a dampener on the share price," a bemused Oliver says. "Mind you, Telstra didn't do so well last year, so it is probably due for a better year, but looking at fundamentals, I just can't see it."

Oliver also believes that the first half will be better than the second, when profit growth is expected to slow and more IPOs come on to the market.

Add to that the "market fretting about approaching Telstra sale and you may see things starting to slow a bit".

Oliver favours miners such as BHP and Rio, energy stocks such as Caltex, Origin Energy, Oil Search, commercial services and supply stocks, such as Coates Hire and insurance stocks generally.

The one dark cloud he sees in his crystal ball is the possible emergence of a commodity bubble, much like the tech bubble in the late 1990s that eventually reduced paper millionaires to paupers.


"Never believe something is worthwhile if it compels you to break your promise"
post Posted: Feb 8 2005, 11:53 PM
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Just thought I'd share a bearish view from one of Morgan Stanley's top economists, seeing as the markets are all bubbly with excitement right now. Keeping a balanced view never hurts!

My Say: Surviving the Year of the Rooster

BY By Andy Xie
1,675 words
7 February 2005
The Edge Financial Daily
© 2005 The Edge Communications Sdn Bhd

If you are thinking of tying the knot, hurry up. The Year of the Rooster is approaching fast. Hong Kong people think that the Year of the Rooster is not good for weddings. Taiwan may have the same custom. You may not believe it, but why risk things? Furthermore, if other people think you have bad luck, they may keep their distance. Bad luck can be a self-fulfilling prophesy.

The Chinese calendar can create its own business cycles. It is a powerful force in creating herd behaviour. The Year of the Rooster must be a depression year for Hong Kong's wedding business. Equally, some years are not good or very good for having babies. Before birth control came along, this was not so serious. Now schools have small classes in certain years and big ones in others. Modern technology has exaggerated the effect of the Chinese calendar. Businesses, from baby trolleys to textbooks, face big but predictable cycles.

Remember the butterfly effect. The Chinese calendar effect could be causing global business cycles (nay…). Alan Greenspan's penchant to solve problems with liquidity, before the market has a chance to self-correct, would be a better explanation.

Herd behaviour (or animal spirit, as Keynes put it) is the main factor in creating business cycles. For example, the periodic surge of optimism from the emergence of a new technology (like railroads then or the Internet now) or a new growth story (like America then or China now) encourages people to invest at the same time. The resulting boom from investment demand validates the optimism and sustains the investment boom. The boom turns to bust when capacity expansion finally overwhelms demand.

This type of boom-bust cycle can only unfold with monetary accommodation. Greenspan has gone further than just accommodation. He has magically taken away the bust after a boom with more money (to save the world, they say). He has "saved" the world so many times that we have forgotten what pain feels like. With so many problems covered up with liquidity, the world has become a giant liquidity bubble with bubbles on top or inside one another. When Greenspan retires next year, the world may have a long and very painful hangover.

Most investors believe in the "global muddling through" scenario. History is on its side. The global economy has survived many scares before. Whenever markets panicked over something, Greenspan would murmur something unintelligible and cut interest rates, and the market would come back. It worked every time. Why should investors worry now?

The global asset market (from property to commodity) is like a sand- castle on a pristine beach. It is so beautiful that we wish it would last forever. And as the waves have always stopped short of the castle, we begin to believe that the sandcastle will indeed last forever.

Some investors believe, however, that one day when one wakes up, the sandcastle will not be there. The trouble is that we do not know when that will happen, and most investors have to invest in the meantime. The best investment ideas should work when the status quo lasts and work even better when the bubble bursts. I have three ideas each on businesses that investors should shun and those they should embrace.

Pitfalls to avoid:

1. Overcapacity

Overcapacity in downstream industries, primarily in China, is beginning to depress profit margins everywhere. The auto sector is a well-known example. This industry may have twice as much capacity as demand in China. One Taiwanese businessman told me that eastern China had added capacity of six million tonnes for formaldehyde production but consumes only 21/2 million tonnes at present. Examples like these are plentiful in construction materials, electronics and components, chemicals and numerous light manufacturing industries.

As most companies with excess capacity are supported by local governments, they will keep producing regardless. The profit squeeze in the downstream industries is likely to spread all over the world. The news flow in this part of the global economy will turn quite negative this year, in my view.

I would avoid downstream manufacturing completely in 2005.

2. Renminbi speculation

An expected Chinese revaluation led the charge in the liquidity surge into Asia last year. A final frenzy in renminbi speculation is possible, especially around mid-2005 when the US economy might disappoint the market. Overall, I believe that the sentiment towards the renminbi will cool in 2005. Sentiments may turn sharply when China's overcapacity problem becomes headline news.

Any asset that benefited from the liquidity inflow last year is vulnerable. The property sector in China/Hong Kong space (both stocks and properties) could suffer. The negative spread between the Hong Kong interbank offered rate (Hibor) and the London interbank offered rate (Libor) at around 200bps is likely the first speculative phenomenon to disappear. When it does, Hong Kong's mortgage interest rate could double.

I would avoid property-related investments in 2005.

3. South Korea's consumption

South Korea's consumption has been quite weak but is showing signs of bottoming out. South Korea is considered a high beta economy -- one that rises and falls quickly. The market has jumped on signs of the bottoming out and has been chasing the recovery story.

I believe that the market is making a mistake. The South Korean economy, in my view, has become a low beta one. The coming recovery will be surprisingly mild. The main reason is that South Korea is no longer an investment-driven economy and household leverage is too high to accommodate a quick rise in credit.

The consumer sector grew rapidly on increasing debt leverage from a low base in the last cycle. It overshot and came down when the credit card bubble burst. While the worst of the credit card fiasco is behind us, current household debt is at 60% of gross domestic product (GDP) and does not have room for another quick buildup. When the previous consumption cycle began in 1999, household debt was at 40% of GDP.

I would be cautious on South Korean consumption.

Strengths to embrace:

1. Balance sheet

Many economies in Asia have improved their balance sheets in this cycle. They have leveraged on China's growth for income but have kept down debt growth at home. Hong Kong, South Korea, Singapore, Taiwan, and Thailand have kept credit growth under 10% despite strong economic growth in this cycle. During a similar liquidity boom 10 years ago, these economies grew credit by about 20% per annum. Clearly, they have learnt their lesson from the 1997/98 financial crisis.

Strong balances will keep these economies steady as the global cycle turns down. In the past, as soon as the global cycle turned, they would experience credit events that would push the economies down. The odds of significant credit events are, we believe, relatively low in this cycle.

The investment implication from this development is that the banks would be quite resilient in the down cycle. In the past, Asian banks were leveraged plays on the Fed cycle. They will behave differently this time, we believe.

The other implication is that dividends are safer in this cycle. Asian companies cut dividends during a down cycle due to balance sheet pressure. This risk is much lower in this cycle.

2. Soft commodities

China had a relatively good harvest due to better incentives from the price increase in 2003. However, imports of agricultural products remained very strong. Industrialisation, urbanisation and degradation of arable land due to over-farming suggest a long-term weakness in China's agricultural production, especially for land and water-intensive products. The long-term trend of prices for agricultural products looks strong.

It is difficult to capitalise on the rising prices for agricultural products. The best approach is to buy farmland with good water supply. Farmland prices vary greatly around the world, because government subsidies have prevented global trade from equalising the prices. As the prices of agricultural products rise sufficiently high to obviate the need for government support, farmland prices should equalise.

The next best approach is to invest in the domestic demand of the economies that are strong in agriculture. Brazil, Indonesia, Russia and Thailand, for example, could benefit substantially from this trend.

While this is mostly a long-term play, it should work in the short term as well. As the global cycle turns down, the news flow from this sector should remain quite upbeat. The industries and economies that benefit from this trend would show better results this year.

3. Energy

I am very bullish on coal but short-term bearish on oil. As China's electricity generation capacity catches up with demand, the country's energy consumption is shifting from oil to coal. China's coal consumption could rise by 10% to 2.2 billion tonnes in 2005, in my view. Domestic production is unlikely to catch up with demand. Imports could rise by 50% or more.

I was very bullish on oil before. Three years ago, I recommended oil as the best play on China's growth. This story is now known to the market.

Moreover, China's overheating has exaggerated its demand in the short term, which the market interprets as part of the structural trend. The long-term oil price is hovering around US$40 per barrel. Considering that China's per capita income is just about US$1,300, its purchasing power is still limited and, therefore, the upside for oil price is quite limited from hereon. Further, the risk of a difficult landing for the Chinese economy could be quite painful for oil.

The macro picture paints a difficult Year of the Rooster for investors. When growth rate is coming down and interest rate is going up, it is an uphill battle to make money. In my view, micro rather than macro holds the key to profitable investments in 2005.

Andy Xie is a Hong Kong-based economist covering Asia for Morgan Stanley


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