US Economic Outlook

America is slithering into stagflation

On the "stag" side:

Punters have been erroneous in loading up in the market. We would counter their wishful thinking with the hard facts as revealed by The Economic Clock™ for the US, on the "flation" side:

  • Congress has been keen to push the dollar down- so American consumers are paying more US dollars for a unit of Euro, won, Singapore dollar, etc.

  • corporate profits have to turn down: next to slower turnover (see "stag" above), margins wilt because US corporates cannot pass the higher import costs on.

  • Alternately, if they do pass higher costs on, then the Fed has to tighten again.

  • Thank you, U.S. Congress! Well done: you congressmen are making the Fed hike rates yet again - even if growth heads south. Corporates and workers will just love your China-bashing. In reality, you are bashing those very groups funding your sophistic campaigns: US multinational corporations and US workers who have been deprived of decent educations....

October has been dangerous in the past

  • October is traditionally a market of crashes, so we've been advising clients to stay out of the markets stick with cash has been the main strategy

  • The Economic Time™ is worsening not only in America, but also in Europe and in Japan - even if there are some sectors always worth looking at if you "must" be in these three markets.

  • Further Fed expectations this year: the "stag" forces more rate cuts, until "flation" rears its beady eyes...

  • Fed rate cut was for good reason: the severity of stagflation is going to be worse than people think - and please don't forget that the Republicans at least want the economy not to be the disaster that Iraq has proven to be!

  • Housing is a psychological feature of the forthcoming "stag" bit, as we just discussed

  • Once the value of your home has fallen, bank lending is also going to decline: bankers have homes and families too, that are nurtured by their careers!

  • This submerging debt will lead to further big bank blow ups - because nobody can measure the degree of the sub-prime mush ("mess" to the power of eight): no accountant possibly can measure the extent of the inter-unevenness of the credits, assets, liabilities, loans given against LBOs, CDOs, and the lot, un-bundling, re-bundling and de-bundling: perhaps a maker of sausages understands more about the current mush than the best financial brains in the industry. Have you ever tried walking on mud after huge storm? Do you feel comfortable doing so - not knowing whether nails, snakes and other nasties could pierce your foot soles?

  • Ramifications of this statistical mush: risk is finally getting a price again.

So if You don’t like the G3, What do you like?

  • Te good news is that the emerging markets are giving a far more viable alternative this time. Things are NOT "different" this time - if the US cracks, so will the world. BUT, what will people climb back in to once the US has cracked? Certainly not the US!! Some emerging markets are now big enough that they offer viable alternatives.

  • Aso, as Dr. Greenspan pointed out in his recent tome: while the developed world (G-3) is going socialist, the emerging world is going capitalist. Do you need a PhD to figure out where to save for your retirement?

  • We remain keen on in China and Hong Kong, but also Malaysia and - to a lesser degree - India

  • China and Hong Kong (HK): what is driving these markets?

  • 17th Party Congress as of mid-October: Hu Jintao is ensuring that he's developed his own legacy. It will focus on growth and thus on jobs creation

  • Another key driver is the Olympics next August: historically, markets hosting the Olympics do well in advance

  • A final driver in China is that with the G-3 slowing, Beijing has to create more domestically-orientated jobs back home

  • Hong Kong is "the water skier off the back of the Chinese speed boat."

  • Within China there is a whole expectation that they will gradually open the capital accounts to allow people to buy Hong Kong and other foreign shares. They call it the "through train", whereby Chinese can buy domestic funds that buy HK shares. Then there is China's sovereign wealth fund, the "China Investment Corp."

  • To cite Dr Alan Greenspan's heavy-weight but insightful memoirs: the "home bias" of the Chinese investors will remain pronounced at first: Beijing will want her reserves invested close to home, i.e. mainly in Hong Kong stocks at the beginning. Only later will these reserves also be invested further ashore, say in America and in Europe, etc.

  • Key Chinese sectors to keep an eye on are infrastructure and construction materials plays, as well as private consumption (courtesy of rising wages in tight labour markets): China is in her first industrial revolution and thus needs to build the foundations for growth, as in roads, bridges, homes, waterways. electricity. And don't forget that the Olympics start next August.

  • We retain our positive view of the market in HK; thus, the finance sector along with brokerages remain strong buys

  • In HK, property is also something to look at, as more mainland wealth keeps coming into HK. Indeed,some of our property brokers have arranged for buses to bring hungry mainlanders to our shores to view properties. Take a look at the changing face of the lovely lobby of the (old) Mandarin Oriental lobby: increasingly, Mandarin (no pun) is out-shouting Cantonese...

  • However, mainland action will be at the upper end of the property market

India

  • The Economic Clock™ tells me it remains a buy, so what am I to say? I feel a little queasy about this call, but then again, the market keeps rising, so who am I to gripe?

  • What sector? We like the whole idea of lower class housing. Demand is extraordinary going forward:

  • Increasing foreign direct investment means that , more jobs are being created, so up go wages and salaries;

  • But the upper-class housing already has become very expensive, so one may want to exercise caution on the upper end and go into quoted companies involved in the lower-end housing bracket, the companies that are building spanking new homes in slums.

Malaysia

  • The Economic Clock™ is ok on the place.

  • I remain keen on these sectors: plantations as a commodities and currency play, IT and - because the market is doing well -finance and securities.