4th September 2011, Market Update: Snatching Poverty from the Jaws of Prosperity – How The Rich Became Poor
Questions for the Rich Economies
Quote of the Day:
Some of Japan’s woes, to be sure, stem from plain bad luck. The global recession of 2008–09 came at a time when the Japanese economy appeared to be on the mend. But the steep downturn that ensued was a grim reminder of the limits of post-bubble resilience, especially for an externally dependent Japanese economy whose fortunes are tightly intertwined with the global trade cycle. When world trade plunged by a record 11.3 percent in 2009, there was no place for Japan (or, for that matter, any export-led economy) to hide. ForJapan, that relapse—its fourth post-bubble downturn—further soured the national mood. And now an earthquake-related recession seems like yet another unfortunate twist of bad luck. The lesson for Japan—or for that matter any economy: Anemic post-bubble economies are particularly relapse-prone in the event of a shock.
Stephen Roach – Chairman Morgan Stanley, Asia
Macro Overview
- Poor Americans: just when they could see genuine improvements in business and profitability, their economy fell out of bed again. This time it was ISM that was the harbinger in early August, followed swiftly by a growth number that implied a recession was knocking at the door. Just as it looked like some indicators were turning up this week, a bleak jobs number beat the analysts forecasts into submission. In a mad scramble to restore some sort of credibility, Street analysts scrambled to lower their forecasts only minutes before the number came out. But alas it disappointed nearly all of the most pessimistic forecasts. Who’d have thought we’d be looking at maps of the World’s superpower showing which states have food stamps usage over 20%? What rotten luck – when you’re down you never get the rub of the green. But then you make your own luck in this World.
- Poor Brits: just when they thought they’d taken all the austerity measures necessary to convince the markets they had their house in order, just when they thought they’d avoided the disaster zone that is the Euro, they get reeled back into the swirling vortex of terror (SWT). An economy highly dependent on two sectors: Finance and Housing, was always going to be susceptible to severe shock in a crisis born out of the Financial and Housing sector. But now the tiny green shoot of British manufacturing has taken a downturn in the midst of a growth slump, what rotten timing. What rotten luck. But then you make your own luck in this World.
- Poor Europeans: the titanic supertanker blunders its way through icy waters reassuring all that the Euro-project is “unsinkable”. But just when it looked like people employed in the economic engine room (German voters) could make concessions to those in the casino hall (bad banks and peripherals, like Greece), just when their leader appeared ready to selflessly risk political suicide for the cause of political union within the region. Then the rumours started that Greek GDP numbers would be around -5% – far worse than anybody had expected. Spanish and Portuguese borrowing costs rise once more, signaling that the vessel may not make it to port without a hull breach. The financial crisis was not even started in Europe – and look at the state of it. When it rains it pours – how unfortunate Europe is. But then you make your own luck in this World.
- Poor Japanese: well into their third decade of monotonous woe and still the exit from economic depression eludes them. But with new leaders and a brand new trading partner (China) things were looking up and, while the tsunami was a stroke of genuine bad luck, the political response was poor and the communication, preparation and regulation of the nuclear industry after Fukushima (the biggest Asian Nuclear Disaster in history) was terrible. Having fought hard to get supply line utilization back at full speed, political credibility of the ruling party (DPJ) collapsed and the newly elected Noda now gambles on a gang of political nobodies to lead them out of trouble. To add insult to injury, its new trading partner, the beacon of hope, appears to be stuttering and their, once dominant, industrials faces stiff competition in a World with anemic growth. 20 years of stagnant growth and roadblocks remain on the path to prosperity. What wretched luck, Japan. But then you make your own luck in this World.
- Why does misfortune oft beget misfortune, one wonders? Morgan Stanley’s Stephen Roach thinks it lies in our response – all too often remedies to economic downturns become the sickness themselves:
This estimate suggests the Japanese economy was afflicted by something other than macro policy errors. The most persuasive explanation focuses on the reluctance of Japanese businesses—banks and nonfinancial corporations alike—to embrace aggressive restructuring strategies. Put another way, the real villain in Japan’s post-bubble malaise may well be the notorious “zombie” syndrome—the productivity-inhibiting role of life-support credit lines that many banks provided to increasingly sclerotic companies that otherwise would have failed.
The walking dead can hardly be expected to spark productivity enhancement inJapanor, for that matter, in any nation. That lesson seems all but lost amid the plethora of bailouts governments around the world undertook in 2008–09. From Wall Street, to AIG, to Detroit, the United States has certainly flirted with its own generation of zombies. The same can be said of Britain and Europe. Think RBS, HBOS-Lloyds, Fortis, Hypo Real Estate, and on and on. Too big to fail, they call it in the West. But how different is that from Japan’s zombies and from the post-crisis problems that arise from the compassionate but ultimately counter productive actions aimed at containing the damage during moments of crisis and distress? If the Japanese experience is relevant, this same defense mechanism could sow the seeds of the West’s own protracted period of post-bubble stagnation—in effect, hinting at a globalization of Japanese-like lost decades.
Market Overview
- It’s rather disconcerting to see European CDS spreads climbing wider, implying that it is getting yet more difficult for European states with poor fiscal records to climb out of the slippery pit they’ve dug themselves into. (see Spanish CDS spreads – chart of the day).
- US yield curve continues to get flatter – although it’ll never invert with short interest rates locked at zero. But just look how this yield curve has flattened (see chart of the day). Really negative sentiment on the economy.
Chart of the Day
Spanish CDS (Source: Bloomberg)
US Yield Curve Flattening (Source: Bloomberg)
Events
Macro Events:
- Update:
- US Jobs Data came out worse than expected. NF Payrolls 0 vs 68k expected. Swiss GDP Bang in line (+0.4% QoQ)
- By contrast Brazilian GDP came in at a healthy +0.8% QoQ – high enough to inspire confidence, low enough not to spark inflation concerns (long time Brazil’s worst enemy).
- Alerts:
- Taiwanese Inflation
- Indonesian Inflation
- Brazilian Inflation
Corporate Events:
- Results:
- China Pacific Insurance [601601 CH],
- Dividends:
- BHP Billiton [BHP AU], CNOOC [883 HK], Fortescue Metals [FMG AU], France Tel [FTE FP], Hutchison Whampoa [13 HK], Standard Bank [SBK SJ],
Reading, Links:
- Global Slowdown:
