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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Golconda who wrote (65202)	8/12/2010 9:09:16 PM
From: TobagoJack	1 Recommendation Read Replies (1) \| Respond to of 217786

just in in-tray GREED & fear - Deflation and the related policy dynamic, 12 August 2010 · Deflationary risks are rising in America, as reflected in the continuing rally in the Treasury bond market. The Fed acknowledged as much this week with its commitment to keep its holdings of securities “constant” by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. While this move does not yet constitute renewed quantitative easing, it is clearly paving the way for it. · GREED & fear’s view remains that renewed quanto easing is coming sooner or later. But it is not coming yet because the stock market has not yet declined enough in a way that would justify such a move, nor has the data deteriorated sufficiently. It must also be remembered that quantitative easing is politically controversial in the context of the run up to the November mid-term elections. · The latest US employment data has certainly reinforced the impression of a private sector that is not getting traction in terms of generating job growth. It is also the case that the US housing and consumer credit related data continue to show waning momentum. · All this deterioration is beginning to get the attention of an increasingly beleaguered Obama Administration. Hence a flurry of articles over the past week about how the administration was preparing an “August surprise” in terms of across-the-board forgiveness of interest and principal for underwater homeowners with Fannie and Freddie mortgages. · GREED & fear’s long held view is that a Democratic administration will at some point morph from advocating interest relief to advocating outright principal relief in the context of a continuing weak housing market. Still, GREED & fear continues to believe that mortgage debt forgiveness only happens after American politicians become really desperate, which is not yet quite the case. · The Chinese data continues to show an incremental slowdown. GREED & fear continues to believe that perceived beneficiaries of China growth, such as the commodity complex, are vulnerable in coming months to a classic China growth scare. Still the upside of slowing data is that the potential for further tightening measures recedes even if Beijing is not yet ready for outright easing. · The China Banking Regulatory Commission has ordered banks to move off-balance sheet trust loans onto their books by the end of next year. This clearly amounts to more tightening, which is why the A share market sold off this week. But the good news is that the regulator is taking pre-emptive action. · The main market consequence of the above action will be to put a further funding squeeze on local government’s SPVs and on the property sector. This is why investors should expect a flood of bond issuance from the latter. As for the local government SPVs, it is inevitable that there will at some point be a significant surge of NPLs from last year’s surge in local infrastructure lending. But GREED & fear’s guess remains that the next six to 12 months are unlikely to see a major pick-up in NPLs from this area. · There remains a growing risk that the yen appreciates further in the absence of any concerted effort by the Japanese authorities to push it down. While the yen is not so far below its nominal high against the US dollar of 79.75 reached in 1995, it is still way off its high in real terms. This reflects the reality of ongoing deflation in Japan when other countries have still been inflating. · A further appreciation of the yen is clearly the last thing investors in Japanese stocks want to see. For they have become accustomed in the 20 years since the Bubble burst to the view that a weakening yen is the only plausible trigger for a decent stock market rally. · Operating margins of corporate Japan are now back to pre-crisis levels even though revenues are still about 15% lower. This is impressive even though in aggregate corporate cost cutting only compounds deflationary pressures. But it does mean that, 20 years on, the Japanese corporate sector is more adjusted to the reality of deflation than its American, British or indeed Spanish counterparts. · The recent pick up in China’s purchases of JGBs reflects primarily China’s ongoing need to diversify away from the US dollar given the massive exposure of its foreign exchange reserves to that currency. The continuing bull market in JGBs has further delayed the day when Japan must confront the consequence of its continuing massive build-up in government debt. · It only makes sense to speculate on a Japanese government bond market collapse if investors are willing to take a five-year view. And that only make sense if investors pay very little time premium for the duration of the bet. With deflationary risks rising in the Western developed world, GREED & fear cannot dismiss the possibility that 10-year JGB yields revisit their lows of 0.44% reached in June 2003. · GREED & fear’s fundamental view on India remains that this is an infrastructure-led credit cycle though personal lending is also picking up. There is also still a great consumer story in India which is being supported by growing evidence of “trickle down” into the rural market. · A further signal of growing risk aversion in America is the behaviour of retail investors in recent months in terms of the continuing outflows from domestic-equity mutual funds and inflows into bond funds. This is yet another symptom of Japanese-like behaviour in the US.