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Want to buy a cheap Ferrari?
Kiron Sarkar
February 13, 2012

Hi there,

Japanese 4th Q GDP declined by -0.6% Q/Q or -2.3% on an annualised basis (-3.1% on a Q/Q basis in nominal terms), much more than the decline of just -1.3% expected - net exports reduced GDP by a massive -2.6%. Growth was impacted by floods in Thailand (supply chain issues) and by weaker Global demand. The GDP deflator came in at a negative -1.6%. The only good news was that capital spending was up by +7.9% and consumer spending rose by +1.2%.However, the overall data is yet more bad news from Japan. GDP should pick up in coming Q's as a result of spending related to the earthquake/tsunami reconstruction spending, though I remain of the view that the Japanese economy, with the Yen at current levels, is going to suffer significantly;

Premier Wen states that China should "fine tune" economic policies as early as the 1st Q. He added that economic conditions in the 1st Q deserved attention and that quick action was necessary. Clearly, the Chinese economy is suffering (sounds like materially), the authorities are pretty concerned and are considering a mixture of policy actions (including stimulus measures/monetary easing?), with the announcement of the appropriate policy action imminently. (Source Bloomberg);

The Chinese authorities have told the country's banks to roll over loans to local Governments, thought to amount to US$1.7tr - essentially China's version of "kicking the can down the road" policy, which numerous countries have utilised. The obvious problem is that the vast majority of these loans can never be repaid, as the underlying projects are uneconomic. The local Governments are implicitly guaranteed by the Central authorities. Oops. (Source FT);

The Pakistani PM has been charged with contempt of Court for not pursuing a corruption charge against the President Mr Zardari. There have been widespread allegations of corruption by Mr Zardari - indeed, his nickname is "Mr 10%". However, the current problems reflect growing tensions between the civilian Government and the military. Pakistan has, since independence, rarely had a civilian Government and, if the current issues escalate, may not have one again for some time;

The Greeks passed the austerity measures in their Parliament necessary to secure the 2nd bail out - by 199 to 74 votes - not a ringing endorsement. However, all leaders of the main political parties have to sign up to the measures - something that is going to be difficult. All very, very boring stuff and Greece will both default and have to exit the Euro Zone. The likely next PM, following impending elections, Mr Antonis Samaras talks about renegotiating the deal following the elections - yeah really. I think Mr Samaras is in cloud cuckoo land - does he not understand that the Euro Zone, in particular, is totally fed up of the Greeks and would love to get shot of them. The German's keep talking about the "Greeks needing to do their homework". Well, they wont and does that mean that they get to wear the dunce cap.

Greece exiting the Euro Zone - getting more and more convinced that it is not a major problem (ex an initial knee jerk sell off) for the Euro Zone;

Portuguese 10 year bond yields are down to around 12.4% - some 20bps lower. Spanish and Italian bong yields are also lower - Italian by more. Looks as if Spanish and Italian yields will converge. Will Spanish yields be higher than Italian - I certainly think that they should. Spain's largest unions are calling for a mass protest on the 19th of this month;

Want to buy a cheap Ferrari. Well go to Italy. Early this year, an Italian friend of mine advised me that Italian tax authorities had raided a fashionable skiing resort in Italy and had checked out owners of expensive car, restaurants, luxury shops etc. A week thereafter one shop reported an increase in sales of 400% - yep that's 400%. Italian authorities continue to target owners of expensive cars according to Bloomberg, who are dumping them asap. May well, go back to London via Milan or Turin. Joking aside, an increase in tax collection will make a significant dent - possibly even result in a balanced budget in Italy. The IMF believe that the "black economy" is about 30% of Italy's GDP - who knows - however, its a big number;

Rupert Murdoch is facing additional problems in the UK. A number of journalists, including the deputy editor, have been arrested as have people at the Ministry of Defence and the police. Allegations of widespread phone hacking, combined with paying off the police and other Government departments continue to surface. The Sun newspaper is Murdoch's most profitable and indeed, influential newspaper. The problem, however, could worsen much further, in particular if its extends to the US, as the authorities could charge News Court under the US Foreign Corrupt Practices Act. Bad news for Murdoch, as if this does indeed happen and News Cort is found in violation of this Act, his licences for various parts of his US media empire could be threatened and/or cancelled. This is going to be extremely difficult for Murdoch and, I for one, would be particularly cautious;

The UK's Confederation of British Industry ("CBI") sees signs that the UK economy is improving and, indeed, they expect GDP to be positive in the current Q, thereby avoiding a technical recession. Interestingly, they suggest that the BoE need not increase the size of the QE programme current Sterling 325bn, following last Thursday's increase. It does appear that the UK economy is improving faster than anticipated, though GDP for the current year is forecast at a lack luster +0.9%. The BoE has, in the past stated that they would wish any recovery to become embedded and QE, off the table following this round, well lets see. Having said that the BoE owns so many gilts - over 30% when the current programme ends that it might actually be difficult to buy any more. I suppose they could buy corporate bonds and or mortgages etc. In any event, its too early and the BoE is one of the most transparent of Central Banks - they will signal their intentions nearer the time;

Asian markets are higher, though China closed flat to slightly lower. European markets are around 1.0% higher. The miners and the A$ are higher on the likelihood of stimulus in China - hope they climb a bit more, as I want to add to my shorts. If the Chinese markets dont rally on the prospect of stimulus measures........

The Euro is strengthening on the better? Greek news - currently US$1.3270 - still remain of the view its a great short against the US$, especially above US$1.33. Gold is at US$1734 and spot Brent at US$118.50 - really hate oil at these levels.

The beach is beckoning, as are the mojitos.

Best
Kiron

 

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