As a Asian, I have different perspective to our British counterpart view of the 'Merkel' deal. Only with 50% haircut will Greece be able to pull back from the slippery slope of ever rising government bond's rate. Greece's rich has already bolted , leaving behind the ordinary folks to fence for themselves. It will be painful, but Greece now truly has a chance to right herself and heal her economy, with the firm guidance and steady support of EU.
The banks' shareholders will suffer through dilution, and rightly so, as it is obvious that the Greek bond's yield do not justify their recklessness. EU has put aside finance and support mechanism to also ensure financial stability of these exposed European banks, without the use of rampant money printing press. The EU taxpayers will also bear some of the burden.
I am confident EU and the EUR will survive. It is not the currency that is at the heart of problem, but the fudging of the national budget books (with the help of Goldman Sachs, in Greece case) that 'helped' to cover up the budget black holes. The new Greek government is set to come clean, and that is a demonstraction of moral courage.
My concern is more for those EU countries like Italy who are still dragging their feets to put their budget in order before they tip over. With the strong mind of Merkel, and Germans' discipline, EU is in save hands, though the process will take a while to overcome.
Europe has been around for a long time, and has build strong tradition and institutions. British who are not in the EUR seems to wish for EUR demise, though they may claim otherwise.
Europe will emerge stronger and steadier than US and even UK who has been infected with the US financial scheming.
Monday, October 31, 2011
Tuesday, August 23, 2011
There is no way out, this time!
The 3 down waves from here on.
After the first down move, the global equities try to fight back, but still ended down as the 1st wave. The stock market will make effort to reverse the downward move, with the belief that the companies are generally doing well and have sound reserves. The key obstacles facing the move are:
1. With high income disparity, or GINI coefficient, especially in the US, there is severe dislocation of consumption, where few rich consumes, while large pool of poor struggle to keep up with their debts, thus weakening the general consumption. Companies are holding back both their investments and staff employment given the weak general demand, except for sectors that are exporting to emerging economies.
2. The emerging countries are now experiencing a delayed effect of weakening demand, where the waves of printed money from US two quantitative easing (and to lesser extent the EUR) hit their shores. It pushes up assets investment, followed by general demand and confidence, but are now faced with high inflation (consumption and assets), and strengthening emerging markets' currencies. They are forced to slow down by withdrawing their fiscal and monetary stimuli. The effect will soften emerging market growth which will lead to a slow down of demand for US and European goods.
3. In the West, due to long term 'addiction' to dole and other monetary support, the unemployed in the developed world did not withhold their spending nor accept lower salary jobs during the good times, thus the pool of unemployed are growing larger by the days, but due to misrepresentation of the unemployment data (where the focus is on recent unemployed workers). The long term unemployed (more than 99 weeks in US), do not appear as unemployed. As such, there is a growing hidden unemployed that is weighing down the economy as they are no longer able to consume. Some gave up living on their own, but move in to stay with their parents while others live in their cars/caravans.
4. The Western economies are further dragged down by their own aging population (where the youngest baby boomers are now at 52 and the oldest are 62 years old, they are entering retirement in large numbers), the demand pattern has changed and the inversion of the population structure is putting stress on the fiscal stability of the government given the growing demand for more free and subsidised social benefits. The unemployed skill sets were geared for growing population where there is high demand for goods and entertainment services, but now, the biggest demand is for medical care, which cannot be matched easily without high costs of training involved. The governments have already overly deployed their financial capacity into rescuing the financial institutions, and are now left with growing high debt to GDP ratios. Now there is limited scope of government financing for skills retraining programs nor national infrastructure investments, as big surplus nations are slowly avoiding the FED issued bonds. Further 'pumping' debts risks pushing up the interest rates, which will adversely push the debt/GDP ratios to even higher. Greece is one extreme example of nations that is reaching its tipping point. This can cause the interest rate spiral upward to unsustainable level. The infrastructure investment would have helped to create new business opportunities which also translates into improving employment but the needed money was 'hijacked' by the banks when FED 'rescued' them, which ends up bankers paying themselves even bigger bonuses, after they were rescued .
5. Banks are paralysed by the 2008 collapse. After transferring toxic assets to FED for money, banks reinvests their money into FED risk-free bonds. Banks are very cautious of lending money to businesses where they are exposed to possible business failure, thus limiting the growth or expansion of new businesses. Banks mainly rollover the existing debts to maintain their balance sheets status quo.
6. Political infighting in the developed world is also holding back the necessary economic policies* to revitalise the global economy, but instead, strangle it with the legal and illegal corrupt practices that widen the GINI further.
In short,
globalisation and political maneuvering have resulted in high GINI coefficient which weakens the global sustainable consumption level. The developed countries' aging population structure is now further weakening the global economic system. As it is, the developed countries' fiscal situation is already at its weakest point. The emerging economies are not able and are not of the equivalent size to counter-balance the weakening Western economies and there is no collective political will to solve the global economic problems, where the mass-media brain washing machines are controlled by the rich, so as to allow them to continue amass wealth at the expense of the poor and ignorant.
If there is no change of governmental policy direction, there is only one outcome, breakdown of society so that wealth is redistributed by force, instead of through the normal functioning of the economy.
Co-authors: Art Lim and Tng Yong Chuan
* economic policies needed:
1. reduce the GINI coefficient through appropriate tax structure; inheritance tax, progressive tax and banks' tax (in return for the central banks' financial injection during the 2008 crisis) to support fiscal budget and improve consumption.
2. invest in sound infrastructure projects that reduce energy consumption, increase mobility (high-speed trains between cities, re-urban development of mass rapid transport system, internet fibre-optic lines, continental rail lines, efficient medical systems) and I.T. infrastructure (national, company and even individual levels) that enhance productivity of the economy. Each country has to look into investing in more targeted industries that can increase their local employment
3. allow emerging countries' investment into Western countries' companies so that their is sufficient momentum of global economic growth. Western economies are trying to 'protect' their national interests by restricting such investment (which hampers some of the sound but financially weak western corporations' ability to grow out of this crisis). Instead, westerners insist that emerging countries hold their printing press papers (or known as government bonds) which depreciates through money printing or quantitative easing mechanism.
4. temporarily subsidise consumption in food, healthcare, household items for the poor so as to tide over the recessionary phase while co-opting the unemployed into some of the national projects
The views expressed on this website/blog are mine alone and do not necessarily reflect the views of my employer.
After the first down move, the global equities try to fight back, but still ended down as the 1st wave. The stock market will make effort to reverse the downward move, with the belief that the companies are generally doing well and have sound reserves. The key obstacles facing the move are:
1. With high income disparity, or GINI coefficient, especially in the US, there is severe dislocation of consumption, where few rich consumes, while large pool of poor struggle to keep up with their debts, thus weakening the general consumption. Companies are holding back both their investments and staff employment given the weak general demand, except for sectors that are exporting to emerging economies.
2. The emerging countries are now experiencing a delayed effect of weakening demand, where the waves of printed money from US two quantitative easing (and to lesser extent the EUR) hit their shores. It pushes up assets investment, followed by general demand and confidence, but are now faced with high inflation (consumption and assets), and strengthening emerging markets' currencies. They are forced to slow down by withdrawing their fiscal and monetary stimuli. The effect will soften emerging market growth which will lead to a slow down of demand for US and European goods.
3. In the West, due to long term 'addiction' to dole and other monetary support, the unemployed in the developed world did not withhold their spending nor accept lower salary jobs during the good times, thus the pool of unemployed are growing larger by the days, but due to misrepresentation of the unemployment data (where the focus is on recent unemployed workers). The long term unemployed (more than 99 weeks in US), do not appear as unemployed. As such, there is a growing hidden unemployed that is weighing down the economy as they are no longer able to consume. Some gave up living on their own, but move in to stay with their parents while others live in their cars/caravans.
4. The Western economies are further dragged down by their own aging population (where the youngest baby boomers are now at 52 and the oldest are 62 years old, they are entering retirement in large numbers), the demand pattern has changed and the inversion of the population structure is putting stress on the fiscal stability of the government given the growing demand for more free and subsidised social benefits. The unemployed skill sets were geared for growing population where there is high demand for goods and entertainment services, but now, the biggest demand is for medical care, which cannot be matched easily without high costs of training involved. The governments have already overly deployed their financial capacity into rescuing the financial institutions, and are now left with growing high debt to GDP ratios. Now there is limited scope of government financing for skills retraining programs nor national infrastructure investments, as big surplus nations are slowly avoiding the FED issued bonds. Further 'pumping' debts risks pushing up the interest rates, which will adversely push the debt/GDP ratios to even higher. Greece is one extreme example of nations that is reaching its tipping point. This can cause the interest rate spiral upward to unsustainable level. The infrastructure investment would have helped to create new business opportunities which also translates into improving employment but the needed money was 'hijacked' by the banks when FED 'rescued' them, which ends up bankers paying themselves even bigger bonuses, after they were rescued .
5. Banks are paralysed by the 2008 collapse. After transferring toxic assets to FED for money, banks reinvests their money into FED risk-free bonds. Banks are very cautious of lending money to businesses where they are exposed to possible business failure, thus limiting the growth or expansion of new businesses. Banks mainly rollover the existing debts to maintain their balance sheets status quo.
6. Political infighting in the developed world is also holding back the necessary economic policies* to revitalise the global economy, but instead, strangle it with the legal and illegal corrupt practices that widen the GINI further.
In short,
globalisation and political maneuvering have resulted in high GINI coefficient which weakens the global sustainable consumption level. The developed countries' aging population structure is now further weakening the global economic system. As it is, the developed countries' fiscal situation is already at its weakest point. The emerging economies are not able and are not of the equivalent size to counter-balance the weakening Western economies and there is no collective political will to solve the global economic problems, where the mass-media brain washing machines are controlled by the rich, so as to allow them to continue amass wealth at the expense of the poor and ignorant.
If there is no change of governmental policy direction, there is only one outcome, breakdown of society so that wealth is redistributed by force, instead of through the normal functioning of the economy.
Co-authors: Art Lim and Tng Yong Chuan
* economic policies needed:
1. reduce the GINI coefficient through appropriate tax structure; inheritance tax, progressive tax and banks' tax (in return for the central banks' financial injection during the 2008 crisis) to support fiscal budget and improve consumption.
2. invest in sound infrastructure projects that reduce energy consumption, increase mobility (high-speed trains between cities, re-urban development of mass rapid transport system, internet fibre-optic lines, continental rail lines, efficient medical systems) and I.T. infrastructure (national, company and even individual levels) that enhance productivity of the economy. Each country has to look into investing in more targeted industries that can increase their local employment
3. allow emerging countries' investment into Western countries' companies so that their is sufficient momentum of global economic growth. Western economies are trying to 'protect' their national interests by restricting such investment (which hampers some of the sound but financially weak western corporations' ability to grow out of this crisis). Instead, westerners insist that emerging countries hold their printing press papers (or known as government bonds) which depreciates through money printing or quantitative easing mechanism.
4. temporarily subsidise consumption in food, healthcare, household items for the poor so as to tide over the recessionary phase while co-opting the unemployed into some of the national projects
The views expressed on this website/blog are mine alone and do not necessarily reflect the views of my employer.
Thursday, August 11, 2011
No more rabbits in the hat
Looks like I have grossly underestimated the creativity of the money printers, or rather, Western central bankers, the rich and the self-serving politicians.
US FED printed USD1.5 trillions with QE1 and USD0.6 trillion with QE2 to support the US government deficits of USD1.3 trillion in 2009, USD1.2 trillion in 2010 followed by USD1.5 trillion in 2011. With such massive Keynesian's and Monetarist's interventions, US politicians believed that they can continue to fill their pockets with money together with the bankers and the rich, assuming that all things will then go well.
Europe is more moderate in their approach, but unfortunately, the Goldman Sachs helped Greeks previous government hide their debts through a complex financial structure of deficits, which seemed to look like healthy government budgets year after year, until, the new government opened up the can. Well, it turned out to be a can full of worms, that is, borrowings (deficits) far beyond a small Greek's economy can manage.
Northern Ireland is not far from Greece, as their exposure from sky-high property prices had collapsed, causing all major Ireland banks to topple. Irish government printed money to rescue the banks, running up high national debts (with 3 years of high deficits). Portugal is suffering to a lesser extent from their own generous welfare system which causes ever increasing deficits. Italy is not much different from Portugal, except that they have a larger economy which allow her to carry higher deficits (120% of their GDP), but the financial market now doubts these governments' ability nor their commitments to rein in their deficits.
China stepped up with a USD850billions capital expenditure which helped to keep the global economy from toppling over in 2009 till 2011 where China is now faced with ever increasing inflation of 6.5% in July 2011. China is stepping on the brakes on her economy through 5 rounds of interest rate and 20 rounds of reserve requirement hikes.
Nevertheless, the economic giants of the West are too big to be propped up, and most of the money were not going into productive investments and development. Instead, it only provides cash for the banks (in exchange of toxic mortgage papers) and props up the rich. The banks and the rich hoard the money within the financial papers and emerging markets assets, leaving the small and medium corporates strangled. As a result, instead of economic recovery, the global economy now teeters on the brink of a great recession.
Real Jobless rate (adults who are able, but are not able to find a job) continues to climb. Official jobless rate only captures data of people who report their jobless status so that they can collect dole, but after certain number of weeks (depending on each countries' policy), they no longer report their jobless status as they are no no longer entitle to dole.
When real unemployment continues to climb, property prices continue to fall, businesses continue to fail as many other businesses depend on property market growth. US is now entering into a economic spiral downward. As GINI widens, US economy weakens as middle income group has been squeezed, causing further fall in demand.
Where does the global economy stand now? It is very much the same chart that I put up 3 years ago, except that it was stretched out by the government monetary and fiscal interventions after interventions.
The western economies have also used up almost all their credibility, thus affecting global confidence throughout the world. This is the beginning of the Great Depression II. The details of the move will be re-chart in the next blog with explanations for the projection.
Monday, April 27, 2009
Swine flu will impact the shares market negatively
At this early stage, we are not sure whether how severe will the swine flu turns out to be. If it is similar to SARS, then the impact was abt one year of negative stock mkt, and it can be worse too. On the other hand, if it is a passing problem that can be contained, then there will still be a short term impact, not for long or deep.
Given the current economic crisis, the effect can be amplified. As such, I recommend a more cautious approach of sell or hold, and not to buy shares until the swine flu issue becomes clearer. (Except for shares that can benefit from such panic, like companies that produces the flu vaccine or related services, eg. private hospitals that is catering to the patients, in Mexico..etc)
The above is based on my observation during the mad cow disease, where I made money from selling GBP, and also the SARS period. Do not underestimate the panic effect of such case, afterall, 80 has already died in Mexico.
Given the current economic crisis, the effect can be amplified. As such, I recommend a more cautious approach of sell or hold, and not to buy shares until the swine flu issue becomes clearer. (Except for shares that can benefit from such panic, like companies that produces the flu vaccine or related services, eg. private hospitals that is catering to the patients, in Mexico..etc)
The above is based on my observation during the mad cow disease, where I made money from selling GBP, and also the SARS period. Do not underestimate the panic effect of such case, afterall, 80 has already died in Mexico.
Thursday, March 26, 2009
Monday, March 23, 2009
3 up-waves of a bear US share market rallies
The three waves of bear share market rallies (or three retracements from the great fall).
The 1st wave was inspired by the statements from Citi, JPMorgan and BofA that their 1st Qtr 09 results are expected to be better than expected, i.e. profits are returning. At the same time, US Treasury Secretary is announcing the TALP program that simply inject lots of cash so as to further 'blue' the banks' balance sheet. Due to aggressive provision in 2008, any recovery of bad or doubtful debts will provide a boost to profitability of banks. Given the large U.S. govt bailout money (cash injections) to key players of financial market, they will be able to honor each other contracts (including AIG), such that the 2008 provision was over-stated (due to earlier assumption of no significant bailout money).
Instead of the financial institutions using their own resources (which are almost all wipe out), the US govt (FED) basically took over the whole financial (in fact, gaming) system where FED acts as banker and players on the same table. FED simply took most of the doubtful loans into his own book, reimburse these 'failed' banks with money so that these banks are able to pay one another. There are leakages, where payments due to overseas counterparties, Deutsche Bank, UBS, ...etc.
Though the 1st wave had started, but it will be for a short period before other worries begin to weaken the investors confidence. The weakening economic activities will take away more jobs and also the other sectors' weaker profits. In addition, the banks are still sitting on a time-bomb of other existing housing loans (excluding sub-prime which by now are almost fully written off), personal loans, credit cards, and commercial business and properties loans while their other 'money-making' activities of the past, CDOs, CDS and other derivatives selling are as good as gone. The basic business loans' profits are low, due to the low interest differential charges levied, and high business risks. There is hardly any new business loans activated, instead it is mainly rolling over of existing loans while banks try to reduce their current loans' books slowly.
The 2nd up wave is expected to re-surface somewhere in June/July 09, due to the effect of global govts' fiscal stimulus which takes the form of slowing down workers' retrenchment while increases demand for other services and production. The businesses that cater to these govt projects will increase their investment. At the same time, the very low inventory situation in most businesses will also increase production to meet the increasing demand of govt fiscal stimulus. Benefits of tax credits (due to last year losses) will enhance the corporate profit reporting. These will reinforce the confidence that global economy are showing better sign of recovery.
The Oct's fear of last year will again pull back the market in Oct 09 and as unemployment remains high, it causes the market to pause and re-examine their confidence that all things are really back to normal. This pull back is likely to be shallow and short.
Nov 09 will start the 3rd up wave bear rally due to the benefit of statistical effect, the growing corporate profits, and confidence. By now, the release of better economic figures and sales will reassure the public and investors that things are back to normal and economy seems to be growing well. (This is what I earlier called the Tsunamic tide retreat or the calmness after the 1st major negative wave). Due to the weak data in 2008 in the 4th Qtr, the 4th Qtr 2009 results will look very healthy and makes the public feel great that economy is in full recovery. At the same time, the bullish outlook of the following subsequent six months (up to end 1st Qtr of 2010) will further push the bear rally to greater height, which DJ is likely to retrace back up to 10335. The confidence will persist till Feb2010.
While this confidence grew, the effects of FED massive money printing will reach its final effect of causing high inflation and thus, undermine the confidence of the USD to the point and pulled DJ down quite quickly to 5087. It will be a sizable amount of dumping of the USD and its assets around the world.
For a longer (and more macro) picture of global economy, please go to Andy Xie's indepth analysis at his website http://english.caijing.com.cn/2009-03-04/110111590.html
Full Article in Chinese: http://magazine.caijing.com.cn/templates/inc/chargecontent2.jsp?
The 1st wave was inspired by the statements from Citi, JPMorgan and BofA that their 1st Qtr 09 results are expected to be better than expected, i.e. profits are returning. At the same time, US Treasury Secretary is announcing the TALP program that simply inject lots of cash so as to further 'blue' the banks' balance sheet. Due to aggressive provision in 2008, any recovery of bad or doubtful debts will provide a boost to profitability of banks. Given the large U.S. govt bailout money (cash injections) to key players of financial market, they will be able to honor each other contracts (including AIG), such that the 2008 provision was over-stated (due to earlier assumption of no significant bailout money).
Instead of the financial institutions using their own resources (which are almost all wipe out), the US govt (FED) basically took over the whole financial (in fact, gaming) system where FED acts as banker and players on the same table. FED simply took most of the doubtful loans into his own book, reimburse these 'failed' banks with money so that these banks are able to pay one another. There are leakages, where payments due to overseas counterparties, Deutsche Bank, UBS, ...etc.
Though the 1st wave had started, but it will be for a short period before other worries begin to weaken the investors confidence. The weakening economic activities will take away more jobs and also the other sectors' weaker profits. In addition, the banks are still sitting on a time-bomb of other existing housing loans (excluding sub-prime which by now are almost fully written off), personal loans, credit cards, and commercial business and properties loans while their other 'money-making' activities of the past, CDOs, CDS and other derivatives selling are as good as gone. The basic business loans' profits are low, due to the low interest differential charges levied, and high business risks. There is hardly any new business loans activated, instead it is mainly rolling over of existing loans while banks try to reduce their current loans' books slowly.
The 2nd up wave is expected to re-surface somewhere in June/July 09, due to the effect of global govts' fiscal stimulus which takes the form of slowing down workers' retrenchment while increases demand for other services and production. The businesses that cater to these govt projects will increase their investment. At the same time, the very low inventory situation in most businesses will also increase production to meet the increasing demand of govt fiscal stimulus. Benefits of tax credits (due to last year losses) will enhance the corporate profit reporting. These will reinforce the confidence that global economy are showing better sign of recovery.
The Oct's fear of last year will again pull back the market in Oct 09 and as unemployment remains high, it causes the market to pause and re-examine their confidence that all things are really back to normal. This pull back is likely to be shallow and short.
Nov 09 will start the 3rd up wave bear rally due to the benefit of statistical effect, the growing corporate profits, and confidence. By now, the release of better economic figures and sales will reassure the public and investors that things are back to normal and economy seems to be growing well. (This is what I earlier called the Tsunamic tide retreat or the calmness after the 1st major negative wave). Due to the weak data in 2008 in the 4th Qtr, the 4th Qtr 2009 results will look very healthy and makes the public feel great that economy is in full recovery. At the same time, the bullish outlook of the following subsequent six months (up to end 1st Qtr of 2010) will further push the bear rally to greater height, which DJ is likely to retrace back up to 10335. The confidence will persist till Feb2010.
While this confidence grew, the effects of FED massive money printing will reach its final effect of causing high inflation and thus, undermine the confidence of the USD to the point and pulled DJ down quite quickly to 5087. It will be a sizable amount of dumping of the USD and its assets around the world.
For a longer (and more macro) picture of global economy, please go to Andy Xie's indepth analysis at his website http://english.caijing.com.cn/2009-03-04/110111590.html
Full Article in Chinese: http://magazine.caijing.com.cn/templates/inc/chargecontent2.jsp?
Sunday, February 8, 2009
Global Economic Tsunami 1st wave hit shore!
In 2008, I hoped that the global economic pain could be over in 3 years, but then I was too optimistic. As the tectonic plates of finance dislocate, it caused a tsunamic effect on the economies of the world.
The instinctive US response to the financial dislocation has constantly been a party politics above national interests, followed by pork barrel fiscal approach which is turning out to be worse than expected. The global banks are now damaged structurally, causing the lending crush of 2009.
By now, nobody would deny that we have been hit by the tsunami’s first wave of economic contraction. Interestingly, we hear about it (some major banks and companies are in crisis), but our feet just get wet (no pay increase or bonus and, some friends have lost their jobs). It doesn't seem to be that bad, just like its first wave.
With governments' massive injections, the tide will roll so far back that it will appear eerily serene and you will feel so unreal when global economy will seem to be recovering well, after the fiscal stimulus is being felt towards the end of the year, Y09. Economies will seem to be recovering, especially the Asian economies. Many banks' analysts will proclaim that the global economy recovery is firmly in place. The world will start to let their guard down. Don’t believe them!
Be forewarned, inflation will then be back, but note that this time round, it is only consumers' inflation and not asset inflation. The follow-up massive Tsunami killer wave will hit shore somewhere between Q1 to Q2 of 2010 with its hyperinflation which will be followed by economic stagnation, also known as stagflation.
Hyperinflation is caused by the massive money printing of US that will spill over to the rest of the world, forcing some governments to do the same, in order to maintain their competitive currencies at low level. Stagnation is caused by then dislocated economic activities and the loss of confidence. In layman terms, consumer prices will climb steadily, killing off global demands for goods while high interest rates will kill off investments too. By now, the big retrenchment or job cuts will be across the board (no longer just the banks or in another words, your family members or yourself are losing jobs too).
The destruction of assets in Y08 will be followed by destruction of jobs in Y09 and Y10. The world's economy will be dragged through a period of deep recessions, not too far from the depression scenario. Strikes and riots will be common scenes on television, in the lands of the once rich countries.
There will be significant impact on most sectors and on all financial instruments; currencies, bonds, shares, commodities and other asset classes, in particular, the property market. I will sketch out the impacts in my subsequent articles.
Fortunately, we live in Asia, and as such, Asia will be the least painful of the three major centres, more for Europe and worst for USA and UK too. After 1998 financial crisis, Asian countries generally have lived within their means, maintaining trade and current account surpluses and their exposure to the US toxic loans are limited.
When will global growth return? Again, I choose to be an optimist that mankind has learned some lessons from the past, that is politicians do not use wars to stay in power at all costs. Instead, they will choose to be the enlightened leaders that carry out painful reform to their economies for growth. In truth, I am more confident of the fact that the multi-polar big players are militarily not too far from one another to wage wars with major players among themselves.
The key players that can revive the global economies are China, US and Europe. China needs to divert exports to domestic consumption, while US needs the reverse. Europe needs to maintain a fair balance of both. In short, Asia should be happy to see some soft economic growth in 2011 while US may have to work out their reforms over a longer period before soft growth returns in 2013, and Europe is somewhere in between.
The instinctive US response to the financial dislocation has constantly been a party politics above national interests, followed by pork barrel fiscal approach which is turning out to be worse than expected. The global banks are now damaged structurally, causing the lending crush of 2009.
By now, nobody would deny that we have been hit by the tsunami’s first wave of economic contraction. Interestingly, we hear about it (some major banks and companies are in crisis), but our feet just get wet (no pay increase or bonus and, some friends have lost their jobs). It doesn't seem to be that bad, just like its first wave.
With governments' massive injections, the tide will roll so far back that it will appear eerily serene and you will feel so unreal when global economy will seem to be recovering well, after the fiscal stimulus is being felt towards the end of the year, Y09. Economies will seem to be recovering, especially the Asian economies. Many banks' analysts will proclaim that the global economy recovery is firmly in place. The world will start to let their guard down. Don’t believe them!
Be forewarned, inflation will then be back, but note that this time round, it is only consumers' inflation and not asset inflation. The follow-up massive Tsunami killer wave will hit shore somewhere between Q1 to Q2 of 2010 with its hyperinflation which will be followed by economic stagnation, also known as stagflation.
Hyperinflation is caused by the massive money printing of US that will spill over to the rest of the world, forcing some governments to do the same, in order to maintain their competitive currencies at low level. Stagnation is caused by then dislocated economic activities and the loss of confidence. In layman terms, consumer prices will climb steadily, killing off global demands for goods while high interest rates will kill off investments too. By now, the big retrenchment or job cuts will be across the board (no longer just the banks or in another words, your family members or yourself are losing jobs too).
The destruction of assets in Y08 will be followed by destruction of jobs in Y09 and Y10. The world's economy will be dragged through a period of deep recessions, not too far from the depression scenario. Strikes and riots will be common scenes on television, in the lands of the once rich countries.
There will be significant impact on most sectors and on all financial instruments; currencies, bonds, shares, commodities and other asset classes, in particular, the property market. I will sketch out the impacts in my subsequent articles.
Fortunately, we live in Asia, and as such, Asia will be the least painful of the three major centres, more for Europe and worst for USA and UK too. After 1998 financial crisis, Asian countries generally have lived within their means, maintaining trade and current account surpluses and their exposure to the US toxic loans are limited.
When will global growth return? Again, I choose to be an optimist that mankind has learned some lessons from the past, that is politicians do not use wars to stay in power at all costs. Instead, they will choose to be the enlightened leaders that carry out painful reform to their economies for growth. In truth, I am more confident of the fact that the multi-polar big players are militarily not too far from one another to wage wars with major players among themselves.
The key players that can revive the global economies are China, US and Europe. China needs to divert exports to domestic consumption, while US needs the reverse. Europe needs to maintain a fair balance of both. In short, Asia should be happy to see some soft economic growth in 2011 while US may have to work out their reforms over a longer period before soft growth returns in 2013, and Europe is somewhere in between.
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