앤디시에-Fortunes Due and Fitting

앤디 시에의 새 칼럼이 Caixin Online에 올라왔네요..번역은 지금 하고 있는 다른 일이 마무리되고 내일 오후에나 올릴 수 있을 듯.. Fortunes Due and Fitting By Andy Xie 01.04.2011 18:35 The allocation of risks and rewards meted out this year in the global marketplace augurs much of the same from last year This year may start out looking like the last, dipping down later and then resurfacing with hope. Like last year, 2011 will be a year of transitions. What's kept the global economy stable – fiscal and monetary stimulus in the West and asset bubbles in the developing world – may also act as a catalyst for the next crisis. The timing for that crisis will likely occur in late 2012. Last year began with an overwhelmingly bullish sentiment. The consensus was that the "cycle" had turned, and that the upward trend would last for years. But by the middle of the year, the evidence came to suggest that the economic bounce didn't expand beyond the stimulus. The global economy didn't behave like a stalled car which would simply accelerate after a push. The double dip fear sent markets tumbling. The selling stopped when the Fed began to talk about its second round of quantitative easing measures, which sent the stock markets soaring. Adding to the optimism was the Obama tax cut package, in which the upward momentum was carried through to the year's end. The news on sovereign credit crises dominated the news flow out of Europe. The euro went on a roller coaster ride on the news, ending at a good level. Tracing its trajectory will help us understand the magnitude of the euro zone's problems relative to the U.S. In the end, the euro zone stacks up well against the US dollar. The state governments in the U.S. are struggling with fiscal problems as big as the fringe euro zone countries. The U.S.'s debt level is much higher and rising faster. As per usual, Japan's economy is an enigma. Its economic data rarely trends one way or another. But the yen remains quite strong. When the issue of Japan's national debt is raised, the markets become more timid. But it is geopolitical news that dominates the Japanese markets. In particular, it's evolving approach toward China. Its foreign minister personifies the trend. He seems to relish a fight, even when none seems to be in sight. The biggest political event in Asia isn't the dramatic posturing between North and South Korea, it is the deteriorating relationship between China and Japan. Both China and Japan are not hot-headed – but they will be taking silent action to get at each other for some time to come. I suspect that it will last for at least another two years. North and South Korea are at the forefront of our attention because of their outward hostility. The world blames the North for shelling a nearby island under the South's control. But there is more to the story than this. The incoming South Korean government took a hawkish stance toward North Korea. I'm not trying to absolve the North, but it is important to identify the change that set the process in motion. The tension will continue further into this year. South Korea's president has a strong desire to prove that he is a leader with a sense of resolve. North Korea has backed down in the South's latest show of force – but it will hit back at a time of its choosing. What impact will this have on the financial markets in general? Very little. Too many want to take advantage of the tumult in the markets, but we don't get the opportunity of a five or 10 percent correction in a day or two from market panic anymore. Even China's monetary tightening steps have not spooked the bulls. Many peddled theories early on that China's central bank wouldn't tighten monetary policy. And they were right. The measures enacted so far can be likened to putting sandbags on a railroad track – just before a runaway train is set to plow through. What is puzzling is why global investors are cheering fro China behind the curve. It means more growth now, but with a higher risk of a hard landing. The Three Afflictions Oil prices have increased by 20 percent since the Fed first bandied about its second round of quantitative easing measures. Is this increase due to the expectation of rising demand or a rise in money supply? Analysts have staked out their position on it, often depending on their attitude toward the QE 2. I'm in the second camp – the global oil consumption in 2010 is up a bit, possibly by one million barrels per day. But, it is still far below levels in 2007 or 2008. Financial speculation, rather than real demand, has been behind the big increase in price. This type of speculation may prove to have been a profitable move. When the Fed releases more dollars, producers are less willing to produce. As the price elasticity of oil demand is low in the short term, the price can be pushed up and stay there for quite a while. Saudi Arabia, the only producer with enough spare capacity in the world to produce more, will only produce more at higher prices. But high prices may change consumption behavior. Before either occurs, financial speculation in the oil market will be profitable. Just how high will the price of oil rise in 2011? I suspect that it will rise slowly in the first quarter and then fall by the mid-year, when global economic data comes out less favorable. Then it will rebound. Possibly in the second half of the year, the Fed will start to talk about QE 3 again. The U.S. treasury market has fallen quite a bit – but is far from a crisis situation just yet. The recent correction has been a warning shot across the bow. No government, not even the U.S.'s can borrow recklessly forever. The treasury yields won't be sustainable. The market believes in low or no inflation. Bernanke wants inflation and will keep printing money until he sees it. Will the market believe him? If you believe that Bernanke can achieve his goal, the 10-year treasury yield should be closer to 6 percent, rather than 3.4 percent. This comes from the same man who once suggested to the Bank of Japan that it should push bales of yen out of a helicopter over Tokyo to end deflation. But this is just what is happening when Obama cuts taxes under the backdrop of a massive fiscal deficit – and Bernanke buys up treasuries to continue funding it. It is only a matter of time before treasury yields will surpass six percent, probably in 2012. By then, the U.S. government debt will be US$ 16 trillion. At a six percent interest rate, the interest payment will be nearly US$ one trillion. The U.S. government revenue is under US$ two trillion right now. At best, it could rise to US$ 2.5 trillion with inflation. It's hard to see how a government can function when the interest payment on its debt is 40 percent of its revenue. When the bond market normalizes, it will fall sharply, on fears of federal government bankruptcy. Lastly, China's steps in monetary tightening signal another large problem on the horizon. China's inflationary issues are really all about money supply. In funding the property market, government spending is racked up. China's inflation is a form of taxation. This is nothing new. Inflation in modern China is always about taxing the savers to fund the government. When one looks at how big the property market is, it is dizzying to think how it can land softly at all. Most people who are in this vast industry believe that it must keep going, because the consequences of an adjustment are unthinkable. To keep it going, the government should build enough public housing to pacify the angry masses. After this is done, the market can continue with its role as the playground of the rich. There are two holes in this logic. First, funding the property market will cause rampant inflation, which can cause deflation and destabilize the society. Second, when government guarantees on affordable housing come through, homebuyers of average to low income will flock to the affordable housing sector. The wealthy will be left without a market to sell to – and a floor to stand on. A Replay of 2010 At the start of last year, I argued that stock markets would continue to fluctuate, inflationary hedging of precious metals and commodities would continue and multinationals would perform well. The same will be true for 2011. The dollar is firm for now because of Obama's tax cuts and QE 2. Precious metals and commodities won't go up fast as long as the dollar stays firm. As soon as U.S. economic data comes out weaker than expected, sometime in the middle of 2011, precious metals will perform strongly again. Like in 2010, the weak data will prompt the Fed to discuss fiscal stimulus again, which could set the entire commodity sector rolling. I am not bearish about stocks in general. I believe that multinational companies are the biggest beneficiaries of globalization. They profit from faster-growing demand in emerging markets and from shifting production to low cost emerging economies from high cost developed economies. One main reason for the struggling global economy is their profit maximizing activities. The PE ratio for the multinational companies is in the mid-teens. It is not cheap, but not expensive either. The global economy could grow by five to six percent in nominal terms with 30 percent of it from the inflation in emerging economies. Their earnings could grow much more than that. Their stock prices could rise by as much. Emerging markets are more bubbly and sensitive to liquidity than earnings. Inflation has prompted all large emerging economies to tighten their monetary policies. But, as the Fed's policy magnifies their inflation problems, their overall liquidity is not yet contracting but not growing much either. I think that emerging markets will mostly fluctuate, as they did in 2010, but experience a big dip in the middle of the year.China's stock market performed among the worst in 2010. The market isn't expensive for big companies, but still very high for small and medium-sized companies. The amount of restricted shares that are turning liquidity is massive. The selling of such shares is a huge drag on the market. For China, a possible surprise for the market in 2011 would be the expansion of the QFII program. State-owned banks and insurance companies are trading at huge discounts to their H-share counterparts in Hong Kong. International institutional investors have not been able to ride the wave as the QFII quota has been filled. China's concern over hot money inflows has limited its expansion. The government may resort to this if it grows concerned over A-share market underperformance. As for property, I'm negative in general. Around the world, there has been a bubble in the real estate sector for many years. It finally burst in the developed economies. As it is a long cycle asset, it is unlikely to recover anytime soon. I believe it will take another two years to cycle out. In emerging economies, negative real interest rates fuel a growing property bubble. Inflation is good for the property market in general. But when the prices are already very high, the relationship becomes inverted. The latter triggers tightening, which tends to impact overvalued assets first. China's property market is especially fragile. The credit tightening policies have kept a lid on the market. The developers probably sold half as much as they intended in 2010. Even though Chinese banks don't force them to repay the existing loans, their other obligations like construction expenses and land purchases must be met. Chinese developers will experience more acute liquidity issues in 2011. They will likely cut prices to increase sales to meet the liquidity shortfall. China's property market will likely fall by 10 to 15 percent this year. This is not the bursting of the bubble, which requires the elimination of the real interest rate. Emerging economies never voluntarily eliminate negative real interest rates on their own. It usually happens when their currencies come under deval‎uation pressure. This won't occur until the Fed raises interest rates quickly either due to a strong U.S. economy or surging inflation. I suspect this would be the story for the second half of 2012. Carpe Diem I don't see serious reforms coming up to tackle structural problems facing the global economy. Even the legacy problems from the financial crisis – for example, bad debts and perverse incentives – have not been dealt with thoroughly. Big banks continue to pursue profits in the traditional banking businesses, usually relying on the cheap cost of capital that comes from implicit government guarantees. This has forced investment banks to take on more risk to offset their disadvantages in the cost of funding. It makes financial markets unstable, because only higher volatility will allow investment banks to cover the gap in costs with big commercial banks. The structural problems are (1) high social costs in the developed economies and (2) high inflation and asset bubbles in the developing economies. The former requires retrenchment and redistribution. We are seeing some of this in Europe. France, for example, just increased its retirement age. This is probably not enough. The critical indicator for successfully dealing with the problem is stabilizing national debt to GDP ratio. We haven't seen that in any major developed economy. The U.S. government is adding to debt quickly, hoping that the resulting stronger economy from the stimulus will bring enough revenue down the road to bring down the debt level. Good luck with that, Uncle Sam. The author is a Board Member of Rosetta Stone Advisors