Friday, June 3, 2011

Stephen Jen's thoughts on the ongoing slowdown

Stephen Jen goes on with his call of slowdown and a more negative stance in risky-assets.

There's not a lot for me to comment since I would rather have said what Mr. Jen said.

Some interesting excerpts:

The European policy makers continue to refuse to recognise the fundamental flaws of the EMU, but they will have to eventually have a ‘stop loss’ on the GIPS countries: no country can have unlimited tolerance for open-ended bailouts.  While it is likely Greece will get another bailout package, despite having missed most of their quarterly IMF program targets, an unpleasant end game seems certain to me.   

The second derivatives of global growth to turn negative in H2. I am not surprised by the latest string of macro data that point to a slowdown in global growth.  The ‘soft landing’ that may be happening in China is still not much of a landing at all, as the latest GDP print showed that China expanded by 10% in the most recent quarter.  China needs to slow down more to keep inflation in check.  The slowdown in the developed countries may reflect the delayed impact of high oil and commodity prices, and cutbacks in fiscal stimulus around the world.
I should recall that in the mid-1990s, the dollar was weak (that was when USDJPY plummeted to 78; inflation-adjusted, that was a super-weak level, much weaker than the level today).  The weak dollar propelled capital into Asia, helping to fuel a credit cycle that was not stopped until the Asian Currency Crisis of 1997.  In other words, there are striking similarities between now and then.  The trend in the dollar itself is helping to push the credit cycle in Asia, but if and when this trend turns, the implications for EM could be devastating.  Many EM currencies are either expensive or very expensive.  With the possible exception of the KRW, virtually all EM currencies are either fairly priced or very overvalued.  The costs of visiting Russia, China, Brazil, and India already rival those in the major developed countries.  This does not sound right, and it is not right.  In my view, the levels of interest rates in EM need to be raised even further, and quantitative credit restrictions need to be put in place.  Until these steps are taken, inflation will remain a symptom of major imbalances building in EM, with consequences over the medium-term.  A reversal in the trend in the dollar poses a serious risk for not just the EM currencies but also their credit cycles. 
SLJ Macro Partners - 2011 06 02 - Stephen Jen - My Thoughts on Currencies

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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