3rd January 2012: Investment Themes To Look Out For in 2012, Part 2: Economic Climate Change – Monetary Global Warming

Quote of the Day:

We will continue to manage well the relationship between stable and relatively quick economic growth, structural adjustment and inflation,

Hu Jintao – Chinese President

Macro Overview

Inflationary Effects Of The Globalized Monetarism

• In this World of interconnected economies, pegged currencies, the new global fiat race to monetary debasement at the World’s most powerful central banks; Fed, ECB, BoE, BoJ (which are all running highly expansionary policy) is undoubtedly affecting the rest of the World. Note, today’s announcement by the Fed to increase transparency by issuing rate forecasts could also be viewed as an extension of their August QE-style rhetoric to promise to keep rates low for 2 years… more expansionary capability, basically.
• That the world’s most powerful monetary authorities have agreed to act with cohesion and coordination, may be a good thing for some of those involved in investment. It protects asset prices as inflation where there exists a slightly unresponsive monetary base (poor transmission to money supply on “Main Street”) as it is more overtly expressed in rising asset prices these days. But we should not dismiss the real inflationary risks to this action, unfortunately not all effects will be felt by the fellow countrymen and women of these central bankers. Indeed, these Feds, by mandate, have little cares for the effects of their policies outside the countries in which they are domiciled.
• This WSJ interactive map of inflation riots around the World is brilliant. But it shows a worrying phenomenon in a World supposedly reeling from a disinflationary Tsunami.
• I have referenced this globalization or infectiousness of monetary conditions about this in my comments:
  • I thought I’d check my Facebook page in case someone I know was planning another revolution
  • When central bankers say stupid things
• On the positive side, inflation in sensitive, emerging growth drivers, such as China, Brazil and Indonesia, is showing signs of subsiding but (as Mr Hu Jintao, above implies) that appears to coming at a cost to economic activity – let’s hope inflation subsides at a much faster rate than growth does and it does not slow too far!

Economic Climate Change: Monetary Global Warming

• Never-the-less it will be important to keep an eye on the asymmetric global inflation symptoms to Western monetary policy – especially in emerging economies in Northern and Western Africa, Middle East, Greater China, South East Asia and South America.
• Given the growing trend of large scale, concerted and coordinated efforts by major central banks to pump seemingly infinite amounts of liquidity have just reached new heights (with Draghi potentially the new money-printer on the block), the consequential inflationary effects around the globe is something I find as intriguing as I do worrying. The red flags could come from anywhere… a fiscally induced inflation eruption in Venezuela, an inflation provoked famine in Kenya, a food riot in the Philippines, a new civil war in Egypt, a political uprising in Sudan or Lebanon. Look about you dear reader, the actions our central bankers are taking to remedy the chilled winds of deflation we feel are undoubtedly heating up the economic atmosphere elsewhere around the World. This is an unwelcome economic heat wave for societies already sweating under the intense blaze of inflationary friction. We’re in an era of economic climate change and this is the new monetary form of Global Warming.
• As I have written extensively about, this was always going to happen. Modern central bankers were always going to choose the lesser of two very evil evils: inflation soft(er) default versus the deflation death spiral. But inflation is a predator, a societal antagonist. People around the World notice living standards slipping but are not always quick to realize that it is the dirty work of inflation making life miserable. In particular, look out for relationships between inflation and potential civil unrest: China, Arab Spring – Syria on the brink of inflation-induced financial collapse, Nigeria and it’s interesting to see inflation on the European periphery back up at over 10% – see Turkey for instance.

Market Overview

Good Rally To Start The Year

• Volume is very light but it’s a good start to the year for most people that’s for sure. VIX is nice and low, stocks are up strong on the good numbers out of Germany and the expansionary ISM manufacturing numbers.
• VDAX, Germany’s measure of stock volatility, hit a 4 month low today as stocks buoyed by the surprise of the year so far as Belgium manages to raise money for the 3 month paper at only a fraction of what investors were demanding for the indebted Eurozone member only a month ago.
• I’m going to show a graph of soy bean prices. Some of this is influenced by stock-piling and weather conditions, but an interesting chart never-the-less.

Chart of the Day

Soy Beans (ACE) (Source: Bloomberg)

Events

Macro Events:

Update:

• HK Retail Sales – 23.5% (better than expected)
• Singaporean GDP – 4.9% contraction – terrible number but was actually in line with expectations
• US ISM Manufacturing – 53.9 (good number, the closer to 55 the better)

Alerts:

• Italian CPI

 

Corporate Events:

Results:

• Nothing Significant

Dividends:

• American Express [AXP], Bristol-Myers Squibb [BMY], JP Morgan [JPM],

Reading, Links:

Nothing Significant