GFA: Global Economic Theme: Chinese New Year

Morning everyone,

Sorry about the long MIA... been very occupied with lots of stuff to post anything, I do believe that ongy has been doing that for a while now:P

Anyway I would like to start my first post of the Chinese New Year (Yes, it's a new year! Forget January 1st) with our view on the global economic themes which we believe should fall into three general categories:

1. The Asia/China Story: As we know China has already begun it's economic tightening through reserve ratio hikes of over , new regulation on property loans and term note rate hikes. The Government has yet to touch the OPR, but this can be expected to change. However, we do feel that the OPR in China will be a measure of last resort by the Government as China is still in the midst of recovery and the US and Europe have yet to recover. We do expect the rest of Asia to raise rates in line with China/US depending on the flow of events, though most likely a US rate hike will have a stronger pull. The continued tightening in China can be expected to continue and will lead to slower economic growth which we feel is positive in the long run especially as these policies are targetting the concerns of property and asset bubbles in China, the biggest beneficiary from these rate hikes we feel will be Chinese Banks who have already lent out historically large amounts of loans.

2. The European Story: Contrary to popular news and belief that Europe is alright... we do see a different outcome. The recent events in Greece have already highlighted the weakness in the European economy with Portugal, Spain and Italy following closely behind. Debt/GDP ratios are expected to increase significantly in these countries by 2011 according to offical EU estimates with most EU nations entertaining large budget deficits due to bailouts conducted in the past year. The EU debt/GDP ratio, currently at 78% is expected to increase even further in 2011 placing Europe in a similar situation as the US with large debt. A closer analysis of these numbers will be followed soon to determine how much is owed to the taxpayer. A bailout of Greece is entirely possible; however, we do feel this would jepordize the position of the Euro as a whole, a point which we feel Germany has recognized through its recent reluctance to bail out Greece. CDS spreads across the Eurozone have spiked as a result of these events. We feel that Europe will continue to weaken as a "sovereign debt crisis" begins to emerge calling out not only the PIIGS nations but also more significantly the UK where debt levels are continuing to balloon.

3. The US story: Not everything we see is bleak however. Looking forward, we feel that the US has passed to worst of the crisis (unless Obama does something insane like make the US protectionist... which is all but impossible, cause he does have leanings towards the unions). We stongly feel that the US economy can be expected to strenghten with the indicators to look out for being "inventories" the rationalle? Well inventories have been consistently declining while the inventory-to-sales ratio has reach historical lows potentially indicating a period of restocking. While looking at this number, US CAPEX has been low and has allowed industrial capacity to decline for the 2nd time in history while corporate cash flows remain high. As companies begin restocking, we believe that this will lead to higher CAPEX spending and industrial capacity growth WHICH should translate into... EMPLOYMENT... a key indicator to increased consumer spending! Recently employment growth has been slow, as employee productivity increases. We feel that there will be a limit to how much employee productivity can increase before employment has to pick up again, and that there isn't long to go especially as restocking in the US becomes a major theme. Hence, we view that the US is geared for growth in the next few months.

The biggest risk at the moment we see is the growing risk of sovereign default in the EU which could spill over to the rest of the world, especially countries that have acquired large fiscal deficits. As this would kill liquidity in the economy.

It's a messy post at the moment, but WIP:D will clean up the post, get some charts and more concreate numbers up in the coming week.

Dive2Blue out.