Kudrna's Stock Market Talk

Quote of the Day:

I’m very optimistic on China, the key challenge for China here is the structural rebalancing that was outlined 9 months ago with the passage of the 12^th  5 year plan – to move from and investment and export-led economy to a consumer-led economy. I think the Chinese are very serious about engineering the shift and I think you’ll be pleasantly surprised to the progress they make in building out a consumer-led growth model. So I’m of the view that we can look for positive surprises from China not negative surprises.

Stephen Roach – Morgan Stanley non-executive chairman

China creates the equivalent of another new Greek economy every 4 months, so you could write off Greece completely and within 4 months China has created another one…

Jim O’Neill – Chairman of Goldman Sachs Asset Management

Macro Overview

Will China-Bashing Continue?

• Yes – is the quick answer. There are too many easy political points to be won by bashing China, in both Europe and the US. That’s the sad state of affairs. Paul Krugman is one of the main antagonists in this respect, so too is Jim Chanos – legendary hedge fund manager. Although, from a macro perspective, the Krugmans of this World are more concerning, as they argue from a political pulpit (Chanos, let’s face it, just wants to make money). As far as I’m aware, neither man has spent any appreciable time in China.
• But China has been the scapegoat for many-a-politician in the West. A real shame when our problems have been almost entirely our own making. That’s what I’ve been trying to show in the past two comments here and here. As developed countries we enjoy many privileges (don’t talk to Asia about Greece and the “fairness” of IMF bailouts!). Whether China chooses to partly control its own economy via the spigot of a currency fixated to the USD is largely China’s own business – they cannot do it forever, we all know that. Of course, it’s fine to brand China a currency manipulator, provided you brand Bernanke one too. I’ve written so much about this you can find it on my blogs here, here, here, here, here, here and here.
• The grim reality is that one of the real threats to the three-legged stool which has supported the global economy for the last 3 decades (see comment: The Original Debt-Pimp) is protectionism. Protectionism towards China will do very little to help Western Economies – production would just move to other low-cost manufacturing bases (Vietnam, Indonesia) anyway.
• If you’re worried about losing manufacturing jobs to Asia and South America you’re about 40 years too late, very little to be gained by trying to ratchet back protectionism against a world where half the population work for less than $2.50 a day. Sure America could become the biggest apparel manufacturer in the World… provided you don’t mind paying $500 for a pair of sneakers.
• I hate to put a pessimistic tone on things, but with big presidential elections coming up in the midst of another global slowdown in the West, I think we can expect protectionism to be high on the political agenda never-the-less.

Comments From The China Bulls

• But not every foreigner misunderstands China. The two most prominent characters at the two most famous investment banks: Stephen Roach of Morgan Stanley and Jim O’Neill of Goldman Sachs, have been the biggest roaring bulls on the Chinese economy for many years now. They show no signs of abating either. Stephen Roach said on Bloomberg recently that he thought China was in a much better place than India specifically with China’s success in bringing down inflation.
• But today I’d like to focus on some choice words from Jim O’Neill on China. Worth watching the video, here.
• A few choice excerpts on China:

If I was a hard landing guy I wouldn’t be feeling too excited this morning

I’m assuming this decade China grows by 7.5%, with inflation 3-4 [percent], translated into Dollars, if they do that (7.5)… if they do that, China will contribute (in Dollar terms) more than the US and Europe put together… so it’s the most important thing in the World – is what I’m trying to say.

The thing that generally impresses me is the Chinese policy-makers themselves – they don’t shy away from acknowledging that many of these things are issues and they try to deal with them. The big one is the property issue. I think something that many people in the West, particularly in the US, misunderstand about this. It’s not like the UK or, particularly, the US bubble bursting. Chinese property prices have turned because the Chinese authorities have deliberately stopped them going up. I don’t know anywhere in the West… that should have been what the Fed did in ’05 may be ’06 may be even flirted with it before that.

• So there we have it, we’ve come full circle this week. The difference between the vision of Chinese and Anglo-Saxon policy-makers in a nutshell.

Market Overview

Something is missing

• Is it just me or is there something uneasy about this equity market. Firstly, all the significant news onEuropecame out last month. It actually ended on a relatively positive note. I mentioned that theEuropeneeded a three-pronged attack on the crisis. Short, Medium and Long Term objectives. These were: ECB participation, reformation of the EFSF and Treaty Change. Almost every one of these was achieved by December – so why didn’t the market rally then? Why wait until January? And now that it is trading up why is it so tentative – why are equities not charging? Why is the Euro not at 1.40 again? As far as I’m aware it’s only really been good news so far this year.
• In fact Chart of the Day is (wait for it) an encouraging PIIGS CDS Chart – 5 year CDS on Ireland… note UK banks are highly geared to Irish debt.
• Earnings and a European recession are the things which must be holding the market back but, honestly, what do we know now that we did not know 3 weeks ago? Something is missing… and I can’t quite put my finger on it. But if earnings come even in-line I don’t see much holding back this equity market from quite a sharp rally into Spring.
• Big numbers out tomorrow: American Express, Bank of America, Google, Intel, IMB, Microsoft, Morgan Stanley

Chart of the Day

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• US Inflation (CPI)

Corporate Events:

Results:

• American Express [AXP], Bank of America [BAC], Blackrock [BLK], Capital One [COF], Google [GOOG], Hang Lung Properties [101 HK], Intel [INTC], IBM [IBM], Microsoft [MSFT], Morgan Stanley [MS]

Dividends:

• CVS [CVS]

Reading, Links:

Nothing Significant

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Tags: Bailout, Bernanke, CDS, China, Debt, ECB, Economy, Europe, Fed, Gold, Greece, Greenspan, Inflation, Investment, Ireland, Jim O'Neill, Macroeconomic News, Politics, Protectionism, Stephen Roach, TIPSTER

This entry was posted on Wednesday, January 18th, 2012 at 10:50 PM and is filed under Economy/Macro/Politics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.