Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They’re Facing Something Worse – Bloomberg Business 09-16-15

Salient to Investors:

Viktor Shvets and Chetan Seth at Macquarie said:

  • Emerging markets and economies are in a worse situation than in the 1997 Asian financial crisis because they now face far longer, more painful and insidious disease with limited or no cures or exits, punctuated by occasional significant flare-ups.
  • The effect of the 1997 crisis were mitigated by excessively loose monetary policies and China’s integration into global trade, which helped all markets recover quickly. However, this is not the environment facing economies in the next 5 to 10 years: long-term structural shifts, driven by the deflationary progress of the Third Industrial Revolution, is aggravated by overleveraging and overcapacity.
  • Turkey, South Africa, and Malaysia are at most risk, while China, the Philippines, and South Korea are at least risk. Brazil and Russia are at lessor risk but their low exposure to external debt could be undermined by slumping commodities and slowing trade.

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Forget The Dips, Sell The Rips – David Stockman’s Contra Corner 08-24-15

Salient to Investors:

David Stockman writes:

  • The S&P 500 has sliced through both the 50-day and 200-day moving averages. 2130 on the S&P 500 will prove to be a generational high.  CAT, China, European luxury brands, the NASDAQ Biotech Index are shorts.
  • Expect the Fed to announce they are well short of the their magic 2% on the PCE deflator and so defer a September rate increase: not because there is too little inflation but because it is scared about the stock market fall. This will catalyze a frenzy of dip buying, claims the market has bounced off support is ready to resume the bull market. Do not buy the dip.
  • In the past 15 years CPI has risen by 2.5% annually if you include housing and rent inflation. The Fed hurts savers and retirees in order to keep Wall Street gamblers in free carry trade money, hoping to generate economic growth by giving the 1%  wealth effect windfalls.
  • The Wilshire 5000 has gained more than $15 trillion of market cap during the last 6 years, while the total value of all corporate equity in the US economy has risen by more than $20 trillion – substantially passing the two earlier stock market bubbles – despite having virtually nothing to do with the long-term trends in the US economy, weak at best.
  • Zero interest rates can do nothing about global deflation caused by massive malinvestment generated by years of zero interest rates and central bank financial repression. The central banks have created a monumental falsification of prices in virtually every asset class, while divorcing the financial market from the real economy.
  • The post-2009 recovery is the final and radical expansion of the growth and capital spending bubble underway around the world since the early 1990s. Since 2013, the massive capital spending bubble driven by central bank policy has begun to roll-over. The cliff-diving phase of commodity and industrial prices and profit margins has only just begun, and worldwide capital spending will be plunging sharply for years to come. Chinese and Korean shipyards will soon be bankrupt, Australia and Brazil are heading for depression.

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Don’t Worry About the Bull Market; Worry About the Dollar: Richard Bernstein – ThinkAdvisor 06-22-15

Salient to Investors:

Richard Bernstein at Richard Bernstein Advisors writes:

  • The bull market is intact. Markets rise after the Fed starts raising as earnings trump rising rates, and there is no end of cycle behavior, like excessive leverage or a big buildup in inventories except for energy.
  • The MSCI European stock index is up 11% year-to-date, but only 5% in dollar terms.
  • Currency is the most important issue when investing globally: between 2002 and 2008 the decline in the dollar accounted for 80% of the gain in the Euro Stoxx 50 index for US investors.
  • The dollar rise since 2011 will continue so US investors should hedge this risk.
  • Bullish on South Korea, which is where Japan was 2 years ago. South Korea has terrible corporate profits and is slipping into deflation so has no choice but to depreciate the won.
  • China is at a competitive disadvantage because their currency is somewhat pegged to the dollar and their companies have a lot of dollar-denominated debt, so they are unable to depreciate and will lose market share.
  • India is unable to depreciate because of high inflation so will lose market share to Japan and South Korea.

FactSet predicts S&P 500 earnings will fall 4.7% in Q2, rise 2% excluding energy: for all of 2015 rise 1.6%, 8.2% excluding energy.

Bank of America Merrill Lynch says fund investors remain bullish on European stocks.

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Christine Lagarde downbeat on global economy – BBC News 10-02-14

Salient to Investors:

Christine Lagarde at the IMF said:

  • The global economic outlook is less positive than in April but is still in recovery, and improved from a year ago.
  • IMF growth forecasts for Hong Kong have not changed.
  • The financial crisis left more major scars and legacies that the economies have been able to deal and so the potential for growth is lower even for the medium term
  • The world risks long-term new mediocre, particularly in advanced economies with legacies of high debt and high unemployment and clouds in Ukraine and the Middle East.
  • The prospects for women integration in Japan and Korea are positive. The education of girls is critical for economic development.
  • The US has sufficient energy and confidence in the private sector to move the US economy forward. The US economy falls deeply but comes back more quickly than other economies.

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BlackRock Buys Korea Stocks as Valuations Lure Foreigners – Bloomberg 09-26-14

Salient to Investors:

Andrew Swan at BlackRock said:

  • Blackrock has an overweight position in Korea stocks as a lot of negativity is already priced in and the market is so cheap.
  • The South Korean equity market could be in the early stages of bottoming.
  • A recovery in domestic demand may help shrink Korea’s current-account surplus and curb the currency’s appreciation.

Oh Sung Sik at Franklin Templeton Investments said some active funds have upgraded the Korean equity market from underweight.

Daphne Roth at ABN Amro Private Banking said the won’s strength versus the yen poses a risk to Korean exporters, which have Japanese rivals, and sees few catalysts.

MSCI Korea index companies are valued about the same as their net assets, a 36 percent discount versus the regional index, and at the steepest discount versus the MSCI Asia ex-Japan Index since 2007.

Foreign investors purchased a net $4.95 billion of Korean shares this quarter, the most among 8 Asian markets and more than 3 times as big as went into Taiwan, and versus $4 billion into India and $1.6 billion into Thailand.

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Irrational Exuberance Overtakes Asia – Bloomberg 12-12-13

Salient to Investors:

William Pesek is  writes:

The “Greenspan put” that flooded markets with cash whenever things got dicey has become the default position in Washington, while in Asia there is an even more dangerous escalation of this policy in papering over cracks in economies that desperately need tougher, structural reforms.

Indian stocks have hit record highs, everyone is talking about India turning the corner, despite nothing really changing from 3 months ago when the rupee was plunging to record lows, politicians fumbled at every turn, talk abounded it would become the first BRIC to have its credit rating cut to junk. India’s current-account deficit is still a danger, just temporarily disguised by a charismatic new central banker. India remains politically corrupt, and the odds are that the BJP is no more a force for change than it was in 2004.

In Japan, the Nikkei 225 Stock Average is up 47 percent despite not one of Abe’s restructuring pledges being fulfilled. Japan is just as heavily regulated, uncompetitive and devoid of innovation as it was the day before Abe came to office. All that is new is a stronger punch recipe. Japan has an overpriced, unproductive and shrinking workforce, not to mention an economic structure geared for success in the 1970s.

PBC Governor Zhou Xiaochuan is deluded in believing China that can grow close to 8 percent a year, no matter what Communist Party leaders do or don’t do. President Xi Jinping’s vague pledges to let markets play a bigger role in the economy has made him seem like a Chinese Margaret Thatcher. Yet as China ends a crackdown on fraud and clears the way for over 700 companies to sell shares, the coming boom in IPOs will benefit from a kind of reform halo effect.

The policies of central bankers in China, India and Japan is no replacement for real reforms, like curbing corruption, lowering trade barriers, creating jobs, encouraging entrepreneurship, building social safety nets, promoting sustainable development and reducing their own role in the economy. Monetary policy can cushion the process of fixing flaws in economies, but it is no substitute.

America’s Greenspanization unfolded at a time in the 1990s of relative stability in a very mature economy. Asia’s Greenspanization is happening far too early in the development cycle, and much too broadly. Evidence of governments letting central bankers do their jobs can be found in Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam.

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Slump-Watchers Dump Yield Curve for 1970s Tool: Cutting Research – Bloomberg 11-26-13

Salient to Investors:

Ellen Zentner at Morgan Stanley said:

  • The Fed’s near-zero interest rate and QE is holding down US bond rates, meaning the US Treasury yield curve would struggle to invert, crimping its effectiveness as an indicator of business cycles.
  • Yield curve inversion signals investors are betting on weaker economic growth – recessions have followed 6 of the 8 times that has happened since 1960, and no US recession in the period was not preceded by an inverted curve.
  • The upturn in the Duncan Leading Indicator since Q2, 2009 confirmed the end of the last recession and its subsequent gain over the past 17 quarters indicates the risk of an economic slump in 2014 remains low. The DLI looks at components that react to cyclical demand, such as household spending, and compares them with economic growth. Since 1970, the DLI has indicated imminent downturns by an average of four quarters. A 1985 FRB of San Francisco study found it a more reliable indicator of business cycle peaks than other tools.

Paul Mortimer-Lee at BNP Paribas said:

  • Arguments that QE can choke consumption could apply to any easing of monetary policy and the Fed’s 3 rounds of asset buying have added 1.5 percent to US consumption.
  • QE cannot both stimulate and deters excess investment
  • Market distortions are often needed to help the economy
  • QE may have had a limited effect on activity, but it has helped to fend off deflation.

Ralph Solveen and Bernd Weidensteiner at Commerzbank said Japan’s stagnation does not provide a template for the euro area because prices fell in Japan not because of a weak economy but because their level stayed elevated during the preceding boom and needed to be corrected, whereas there was no such jump in prices in the euro area, where inflation is likely to grow at an annual rate of 1 percent, excepting peripheral economies like Greece and Spain, where a price correction is now under way.

Bank of America said Ukraine, Turkey and South Africa are the emerging markets most vulnerable to Fed tapering, while China and South Korea should be the most resilient. Ukraine and Turkey suffer from high external debt and a lack of reserves, while South Africa is weakened by its current account deficit. South Korea benefits from low inflation volatility and a strong fiscal position, and China has a current account surplus and large currency reserves.

Bank of America said a 1% shock to US growth would have the most durable impact on Mexico but provide a pickup for South Korea, add 0.2 percent to expansion in Turkey and India, and a modest and short-term effect on China.

Anja K. Leist at the University of Luxembourg, Philipp Hessel at the London School of Economics and Mauricio Avendano at Harvard School of Public Health found that men aged 45 to 49 and women aged 25 to 44 in 11 European countries who suffered through an economic slump showed worse cognitive functions 25 years later.

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Surrounded by Turmoil, Korea Faces Midlife Crisis – Bloomberg 08-29-13

Salient to Investors:

William Pesek writes:

Scary drops in the Indian rupee, Indonesian rupiah, Malaysian ringgit and Thai stocks are fueling anxieties almost everywhere.

Korea is a rare exception. A current-account surplus equal to 4.9 percent of GDP, a well-performing won the IMF says is undervalued, and expectations for 4 percent growth in 2014.

Investors who bet against Korea over the last 15 years have not done very well.

Timothy Moe at Goldman Sachs said in June that worries related to Fed tapering are unlikely to impact Korean equities as much as the rest of Asia.

Korea’s real challenge is to find a new economic model to replace its previous dependence on exports, but it is moving too slowly.

Lee Jin-Woo at NH Investment & Futures said how Park intends to shake up Korea is all very vague, and the definitions keep shifting – no one knows what the president means or what she is doing.

Using slogans and photo opportunities with Mark Zuckerberg hasn’t worked for Singapore.

Reducing the role of Chaebol, family-run conglomerates, is central to making Korea more dynamic, but Park’s predecessor squandered his term broadening it. Unfortunately Park this week asked the Chaebol to increase investment to hasten economic growth and in return, promised she would prevent regulations from obstructing their business activities.

Scrapping a 5-year-old proposal to sell Korea Development Bank signals that Korea plans to follow the China banking model, now shackled with bad debts run up by indiscriminate lending to favored enterprises.

Korea is not headed for a lost decade as Koreans have proved time and time again that doubting their tenacity is a sucker’s bet, but one should not ignore the risk.

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Chaos develops out of democracy Jim Rogers Blog 08-28-13

Salient to Investors:

Jim Rogers writes:

Plato said that societies develop from dictatorship to oligarchy to democracy to chaos and then back to dictatorship. Chaos seems to be what is happening in some Asian countries.

Japan, Korea, Singapore, China were all one-party states but as they became more prosperous, their people wanted more, demanded more and got more democratic, and they say this is the Asian way.

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