The global financial crisis: Where we go from here
|Aug 20, 2007|
One asset class that is undergoing the fire sale is commodities. And this, along with various Asian markets, will rebound sharply once value has been created. Subscribers know when we feel - yes, feel, not think! - that this will occur. It is tough to put a time frame on panicky emotions, back to Prof. Kindleberger's marvelous anatomy of a crash.
China has not stopped growing because of sub-prime, CDO, SIV or ABCP strudels in Texas and Frankfurt, Germany. Nor have her Olympics been canceled. Nor has her 17th Party Congress. Nor has growth in India been stopped because of America's Countrywide Financial Corpse. The Economic Time™ in Korea will not worsen because of US and European financial convulsions, either!
This implies that the commodity sell-off is more about fire sales than about growth concerns. All of which implies that this asset class will do particularly well in the rebound.
China: Sub-Prime and Slippery Pork: Which way will they drive the market? Various China H-share banks are estimated to have incurred losses of RMB4.9bn from their exposure to America's sub-prime mess.
Even though markets in China seem impervious to such news, we are not. As Abe Lincoln put it, "You can fool some of the people some of the time, but you cannot fool all the people all of the time."
Do you know why China's A-share market and thus banks are just as much at risk domestically as are the US and European markets engulfed by the sub-prime quagmire? There are two scary, bottomless reasons....
Global Market Convulsions Resulting in a Countrywide Financial Corpse & Currency Undulations
1. The Global sell-off reflects America’s worsening Economic Time:
In mid July investors finally accepted that The Economic Clock™ for America is worsening.
This Will last until at least November
Asset management problems have morphed into a liability management issue
Will keep infecting Asia as funds have to sell Asian assets to cover redemptions
2. End of the world?
The selloff lays to rest the nonsense that Asia etc. has de-coupled from America. If anything, economies are now even more locked at the hip: witness the (tiny) exposure of China’s banks to America’s sub-prime loans and thus to its “Countrywide Financial Corpse.”
Besides, America’s stock market cap of US$16 trillion still dwarfs that of Europe’s and Japan’s combined, and is 8 times larger than China’s! In addition, much of the liability management problem stems from rather greedy German banks
But non-US markets gradually are creating choice for the investor
Thus, our guess is that once things settle, people will recognize that The Economic Time™ in America is going from bad to worse, while that in China/Hong Kong/Korea and India remains very good.
3. Currency convulsions
The idea of borrowing cheaply and investing in higher yielding assets has gone up in smoke – as it always does.
Thus, people who borrowed yen have to repay their yen debts – by buying yen. So I could see it reaching 105/dollar by end November.
Meanwhile, with US interest rates higher than the euro’s, expect the dollar to strengthen against the euro.
Thus: go long the yen and short the euro