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Kiron Sarkar
November 30, 2011
Hi there,
More grim news (with sharply lower equity markets) from China. My
friend, Ari Merenstein (whose analysis is amongst the best I've seen)
summarises it impeccably - the Chinese may have left it too late to
embark on monetary easing - by the way, I would bet that monetary easing
is inevitable, even though a Central Bank adviser suggested that tight
monetary policy will continue next year. However, my friends at Brown
Brothers Harriman suggest that Mr Xia Bin's (the PBoC
adviser) comments seem to have been misinterpreted.
Just when the Euro Zone seems to be coming to a sort of conclusion (I'm
still uber cautious - it's the Euro Zone/ECB/EU after all), China pops
up. Bad news for the A$ and the miners - my way of playing a short China
strategy + global markets generally.
Exports to Europe, from China, are collapsing, shipping sources report
- no great surprise and don't expect a recovery any time soon.
The Shanghi markets closed down 3.3% today;
The FT reports that Indian companies are facing difficulties, indeed a
number of companies are defaulting on their forex loans - apparently
they have mismatched forex borrowings with Rupee assets. Classic
economics 101 is DON'T DO THAT - must not have been translated into
Hindi.
India's GDP growth slipped to 6.9% (on an annualised basis) for the Q to
September - the first time GDP has been below 7.0% since June 2009.
I regret to say, I cant see the upside - unfortunately more downside -
don't forget, when my Indian friends get worried (as they are right
now), watch out. Cant see the RBI maintaining its tight monetary policy,
though inflation (currently, the fastest in the BRIC's) is nowhere under
control. Indian Rupee - not quite as bad as the (likely, soon to be
introduced) Drachma, but......;
Mr Noyer a French member of the ECB - soon to have a colleague appointed
to the ECB board, reports that the economic situation in Europe has
worsened significantly over the last year. Sacre Bleu - quelle surprise
- I think not. However, the much more important issue is that Mr Noyer,
his colleague and a host of other ECB voting members are going to vote
for - you guessed it - ECB bond buying/QE and, in due course, assuming
much tighter and verifiable fiscal controls within the Euro Zone
(including penalties for non compliance), will be supportive of EURO
BONDS;
Greece is to get its next tranche of aid by mid December, reports Mr
Junker. Well yes, but, as usual, expect the usual Greek dramatics the
next time around. At some stage, the chances that the Euro Zone will
pull the plug, is pretty high, I would have thought - and rightly so.
Greece is simply not worth the trouble and will never play ball;
Mr Regling, the head of the EFSF suggests that it is impossible to
provide a number for the size of the (non bazooka) EFSF - not
impossible, Mr Regling, just that it's nowhere the amount initially
suggested. The Dutch talk about 2 - 21/2 times leverage by the way - the
trend is clearly that the "firepower" of the EFSF is heading southwards.
The hottest telephone line is that between the Euro Zone as a Ms Lagarde
at the IMF. Personally, I continue to believe that the IMF will become
involved, in spite of a number of you being tres/uber (my linguistic
skills end there) sceptical.
By the way, check out Barry Ritholtz's Big Picture site. Included is an
article which sets out, in chart form, how the EFSF works. You will then
understand why I am totally, absolutely, fundamentally....
sceptical - reminds me of a Greek budget plan - OK hands up, totally
uncalled for;
Great article my Ambrose Evans-Pritchard in the Telegraph. To summarise,
Euro Zone money supply is tanking - the 3 main indicators, M1, M2 and M3
are declining in absolute terms, particularly in Southern European
countries. M3 is closely watched by the ECB - apparently it has
contracted by E59bn to E9.78tr - banks are contracting their balance
sheets, basically. M1 in Greece on an annualised basis (using the last 6
months data) is down 20.7%, 16.3% in Portugal, 11.8% in Ireland, 8.1% in
Spain and 6.7% in Italy.
Forcing banks to recapitalise (when they cant access equity capital) has
its consequences in adverse market conditions. Deutsche Bank reports
that deleveraging could reach E2tr over the next 18 months.
For those loonies out there who worry about ECB QE raising inflation,
look at these numbers. I repeat, follow guys like AE-P and James
Ferguson whose article in the FT the other day, explained quite clearly
why QE in the Euro Zone by the ECB would not be inflationary;
Fantastic article by Martin Wolf in the FT today re the Euro Zone. He
advocates a CREDIBLE commitment to halt contagion - Germany please note;
the Euro Zone must have policies for economic growth and adjustment -
Germany please note; and longer term reforms are necessary, though not
if Germany insists on fiscal discipline, above all, in all that matters
- Germany please note.
He concludes that the Euro Zone has a "choice between bad and calamitous
alternatives" - too true mate. To be fair, Germany seems to be getting
it right now (I suspect because they can see that markets are and,
unless they do something, beginning to target them - self interest is a
powerful motivator).
I for one, would suggest that Mrs Merkel hire Mr Wolf asap - she
desperately needs advice.
Having said that, recent actions by Mrs M suggests to me that she is
getting it and, furthermore, is being practical - a number of informed
individuals advise me that she is practical, clever and purposeful.
Recent actions confirm that, I accept.
As I have repeated, never underestimate the Germans when they get it and
then pursue an agreed policy;
Interestingly, German October retail sales rose by more than forecast in
October (+0.7% from September, as opposed to the just +0.1% expected).
Good news, but German consumers are notorious for being ultra cautious
at the first sign of a slowdown - and boy oh boy, one's coming;
Have had time to review the UK Autumn Statement - bleak news - another
5 years of austerity - basically porridge, rather than strawberries and
cream at Wimbledon. Growth just +0.7% next year (likely lower), from
just +0.9% this year. 2014/5 budget deficit to be +4.5% (the first time
its below 5.0%), whilst overall debt to GDP will rise to 94% -
previously 87% (credit downgrade looks a near certainty). More than
Sterling 111bn of additional debt, than forecast, will be incurred.
Oops. The Government is to tighten further, though in future years. QE,
currently at Sterling 275bn, will clearly be increased (my forecast
Sterling 500bn) and has been well signalled by the BoE, though the BoE
reported that it cannot buy more gilts than it does at present, given
supply issues. As a result, the next increase in QE is in Feb/March next
year - the current Sterling 75bn ends in February next year UK consumer
confidence is at a 2 1/2 year low;
Threats of downgrades to the whole Euro Zone, the US (Fitch), the UK
etc, etc. A simple question, which counties will be AAA rated at the
beginning of 2013?.
Furthermore, numerous banks have been downgraded by S&P, both in the US
and Europe - no great surprise. Moodys is warning as well. S&P has
changed the basis it looks at ratings - it's more downbeat on US and
European banks, given Sovereign debt issues, and more optimistic on
banks in Latin America and Asia;
European markets have opened lower. The Euro, well its lower, below
US$1.33 - basically, same old, same old.
In spite of all the problems, Oil remains well supported. I appreciate
that Saudi Arabia has advised that it will not increase production
(Saudi Arabia needs high Oil price to pay for the bribes it has offered
to its citizens to avoid social tensions).
Internet playing up again. Better finish this off, before I get yet
another power cut/total Internet failure here in Goa.
However, still buying on dips !!!!!
Best
Kiron
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