i believe that would be just plain smart
and
i do not believe beijing is dumb
but
i would not think that they would do an open mkt operation
as opposed to simply take the imf gold
let us watch and brief
in the mean time, just in in-tray
GREED & fear - The stampede to guarantee, 13 November 2008
The current consensus of US investors is that China growth is collapsing and Asia is a correlated train wreck with the US consumer. But GREED & fear is still not convinced that Asia is going to be a complete correlated train wreck with the West.
The sentiment towards Asia and indeed towards emerging markets in general is going to be driven by attitudes towards China. If the current mood has suddenly swung to the very bearish, the fundamental issue to consider is whether what is being witnessed is just a short but sharp inventory correction or whether something more structural is taking place.
The case for the inventory correction in China is quite compelling given the sudden downdraft in US consumption. But the case for a structural inflection point having being reached in China is to GREED & fear less compelling. GREED & fear still regards China as part capitalist economy and part command economy. Most importantly, the China banking system is still in large part command economy driven.
This week's monster Rmb4tn fiscal stimulus package from China and the recent U-turn on policy towards the residential property market mean that the Chinese government is now in full scale reflation mode. The potential problem for the mainland stock market is that the government efforts will be focused on reflating economic activity or the "top line". Still the longer the market does not respond in a convincing manner, the more likely becomes a major government support buying operation.
GREED & fear's view remains that there is a fundamental distinction between Asia, which is experiencing a cyclical downdraft, and most of the Western world which is experiencing a debt deflation bust.
The political decision in America about what to do about Detroit is not unimportant. A crude bailout of Detroit will be taken by the rest of the world as a signal about just how rotten the US political process is in terms of its ability, or lack of it, to make tough decisions.
The growing resort to government bailouts in the US also raises the key issues investors need to focus on over the next year. This is when the current strong-dollar deleveraging, deflationary trend morphs into a weak dollar, dollar-debasement trade; as a natural consequence of increasingly frantic American efforts to stave off a depression by transferring liabilities from the private sector to the public sector.
There is no way of knowing for sure when that inflection point is coming since it will depend on the policy evolution from here. But the inflection point will be critical to gauge since every asset class will trade differently in a dollar-debasement world than in a debt-deflation strong dollar world.
GREED & fear is surprised that the US 10-year Treasury bond is not 50bp lower given the violently negative action in US equities over the past two months. The best explanation for why this is the case has to be supply concerns in terms of the growing T-bond issuance and escalating fiscal deficit projections. Still the Japanese precedent shows that in a deflationary world the risk aversion trend drives bond yields lower more than the supply concerns drive them higher.
It is increasingly clear to GREED & fear that the prevalent practice by Western governments of guaranteeing bank deposits and bank bonds is having very unfortunate consequences for those emerging market banking systems where governments are less willing to engage in such panicky policy making.
What should be happening is that bad banks should be allowed to fail meaning that deposit flows would surge to the good banks, thereby awarding them for good behaviour. If this is clearly not happening, it does not mean that the "guarantee" policy is without risk. For the more the guarantees extend, the more depositors might wonder if the guarantees mean anything.
This is the direction in which the world is heading if governments persist in this stampede to guarantee. Blanket guarantees do not represent tough political decision making. Rather they represent the easy way out, consistent with the complete lack of discipline associated with the current US dollar paper standard. To state the obvious, this paper standard continues to live on borrowed time.
GREED & fear's hoped for relief rally is clearly for now not happening. One explanation must be the complete lack of clarity about what TARP is meant to be. The desire for a new administration with a "fresh" approach is almost palpable. Mortgage relief is likely to be a priority. Whatever the exact details of the final policies implemented, this is likely to be the direction in which policy is heading.
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