The end of NEVERLAND is near!

Art, 13 Mar 2008

US excesses will not get off the hook, except that the world will bear some of the fallouts due to their exposures in US assets (mortgages, bonds and equities). Given the extreme leverages by the US economy, we should be looking at least, 3 to 5 years of recession or close to zero growth and inflation.

US is determined to weaken their USD against all other major currencies, cutting interest rates in the face of inflation, as a way of exporting their way out of recession. By pushing it too hard, in the face of credit seizure, it will instead drive out investors of their bonds (US bond prices will drop significantly soon), thus pushing their US bond yields to even higher levels, which will further aggravate the mortgage, personal and corporate borrowing problems.

Europe is a close competitor, e.g. Unilever vs. Procter and Gamble. Unilever will suffer a loss of its competitiveness vis-à-vis the exchange differences. Fortunately, as all their productions are in third countries, China or India, the costs will be the same for either the US or European firms. As long as the Europeans are able to manage their overhead costs, Europeans will still be quite insulated from the US onslaught. They will not be competitive outside of EU countries due to transportation costs, except for those that have production in other major emerging countries. US will improve their exports, but at less than its weakening USD rate, given that their products face low-costs substitutes from emerging markets' products too.

Japan has been on the quiet, but not for long as their JPY has also been rising. Japan was not as successful as the US or Europeans in tapping on the Chinese and Indian production engines due to cultural and political factors. As Japan still maintains a sizable production within the country, as such, their costs will rise with the rising JPY, thus weakening their competitiveness. For other Japanese MNCs that have diversified their production centres, they will be in a position to compete well, against the US companies, e.g. cars though Japan still faces stiff challenge from the European counterparts.

As Middle-East oil money builds up, with crude oil at USD100 per barrel and at the rate of USD800 billions excess fund a year, it will a major source of fund for investment. Given the high holding of three key USD, EUR and GBP asset holdings, they will be diversifying into emerging markets for better yields of their funds.

BRICs will slowdown significantly for 2008 but they will gradually pick up in 2009 on the strengths of their own economies as they learn to manage their internal economic growth.

Investment opportunities
1. Buy value-for-money business, eg Wal-mart which offers no frill products as economical prices and MacDonald for economical food. Dump companies selling mid-range brands as income and asset values fall
2. Buy companies that offer low fuel consumption companies, e.g. buy trains or bus services, and dump US car making, airlines or taxi companies
3. Buy emerging markets utilities, eg Telcomm and power stations
4. Buy medical care companies, those that are well managed and with good brands
5. By generic drug producing companies
6. Buy companies with high cash hoard, eg tobacco companies
7. Park into emerging stable countries currencies.

In short, in difficult times, people go back to basics as they still need to eat and sleep to stay alive.