China is now starting to initiate the loosening of monetary policy as the economy is showing signs of growth slowing down. Consider the recent PMI readings, which have now dipped below 50 for the first time properly - not a small fake-out we saw a quarter or so earlier. The authorities now see a potential recession as the main threat with exports slowing considerably, instead of inflation fighting which was a front seat in the central banks policy for months. Consider the following from the recent Barclays Capital GEMs Research Newsletter:
- The PBoC’s latest policy report confirmed that policy easing has started, although it may take months before the central bank adopts an overall loosening bias. This shift will probably take place in Q1 12, in our view.
- The timing of the policy change depends on two factors: the future trajectory of the economy and policymakers’ ability to resist political pressure.
- The central bank now aims to achieve stable growth in the money supply, bank credit and total social financing. The recent uptick in bank credit, however, was a response to shrinking off-balance-sheet activities.
- We expect the authorities to focus on controlling systemic risks, especially those related to small enterprises, private lending, shadow banking and local government finance.
- With the increasing importance of cross-border capital flows and off-balance sheet transactions, adjustments of certain policy instruments can be viewed as having been made to stabilise liquidity conditions, not necessarily to affect pace of economic growth.
- Market interest rates could decline, although policy rates are likely to be on hold for now. Currency appreciation may also slow in the coming months as both capital inflows and exports slow.
- There is a risk of a premature and aggressive shift in monetary policy, which would be positive for asset prices in the near term, but negative for growth sustainability in the long run.
I would like to comment on the above points publish by Barclays Research Team. There seem to be a reoccurring pattern of thinking, especially when I watch CNBC Asia or Bloomberg Asia during morning breakfast, where market pundits believe that Asia has a very strong buffer in the monetary policy department. In other words, these guys believe that since China and the surrounding Asian economies pushed interest rates higher during 2009 and 2010, now they have the ability to cut interest rates and therefore stimulate their economies. This even applies to Australia, where our Treasurer Wayne Swan keeps saying the same thing on TV all the time. Therefore, this thought process leads the bulls to conclude that falling interest rates will make risk assets rally sharply.
Honestly, I am not so sure about that. While this type of wonderfully bullish thought process sounds good theory, it might not be as rosy in real life. First of all, cutting interest rates will put pressure on currencies like the Australian Dollar, Korean Won, Brazilian Real and Mexican Peso - and these currencies have strong correlations with risk assets like equities. Second of all, when I see the PBoC turning away from inflation fighting, towards easing - that to me signals that there must be a very important reason for this change. Why? Well it is not as inflation is really falling. Smart people state everyday that inflation is running between 10 to 15 percent annually. It is not as if China "accomplished" its inflation fight.
So in other words, the reason of a policy shift is an urgency to protect the economy that is really slowing down substantially. Super bears have been waiting for a signal to when the Chinese economy and its property bubble might hit the edge of the cliff, so a recent move by the central bank towards easing, has now maybe given that signal. Therefore, further easing by China and Asia in general, could be a strong reason for investors to believe that "shit is really hitting the fan" and press a sell button. On a final note, consider the interesting video below by Mr Chanos on Bloomberg (nothing new):
Cutting interest rate or easing =buying opportunity? It is absoluely dangerous thought in stock market. Dont forget any policy necessarily take time to affect market. When recessionary force still is large than montary stimulus, market can keep falling as you think.
ReplyDeletegot run over in 1982 short wise with exactly this condition in place.
ReplyDeletenearly everyone was bearish then-terribly expensive mistake being short that time when the US Fed started to reduce rates.
should have been more attentive to the underlying psychology of the market which I was not, etc for the technicals, too.
It will become very interesting worldwide. In the past time, during the last 65-82 secular bear, rates were low, but the debt was low too. States can afford to let the rates increase without feel the debt burden. This time, rates have anywhere to go but up, and the debt has anywhere to go but down. Secular reversal. Today looks like whatever happens, rates are set to go up.
ReplyDeleteLook at the links (worldwide rates):
http://pigbonds.info/
Rates increases in 10Y US, Japan, UK, CHF, GER is scary. Of course they are low, but the overall rates picture is scary worldwide. It looks like the market feels no place to hide (whatever QE or not, currency issuer or not). Do you remember this summer, I was long arguing that the TB30Y will top in the 145 area, and retest it during year-end. Here we are.
That said, on the short-term, we are close to capitulation on equities and EUR.
China: funny, everybody is sure the PBoC will engineer a consumer-oriented rebalance, and China will continue to grow at 7-8% annual rate. In 2000, Private consumption was 48%, now felt to 35%. Investment was 30%, now 49% of GDP. China did learn nothing for "Stalin Over investment growth Model". Assuming a 7% yearly GDP increase, Consumption must grow at the rate of 10% yearly during 5 years to reach only 40% of GDP. It must grow 9% yearly during 20 years to reach 50% of GDP. Go ahead, make my day. Even a miracle cannot do that. The best case that can happen is Consumption will reach 50% GDP within 20 year, by slashing GDP growth in the 2-4% rage during a long time. Their export markets haven't got anymore money to pay. Finish. Terminé. Basta. In that case, PBoC must deal with their biblic investment bubble and banking dark loans.
Central Banks had created a money flow monster, driven by fear and greed. He is now getting out of control. To much money is destabilising for global economy. At this point, the only way to stabilise this economy is to control money-flow again. Free capital markets secular trend will reverse too.
Fred
Bo - there are plenty of fund managers who believe Asian equities are attractive and if central banks cut rates, that will create a big rally. Actually I also believe they are attractive, but I also think they will get "more" attractive when China suffers its setback. We need to see that final collapse in GEM equities before we can call a bottom!
ReplyDeleteAnonymous - I have argued so many times on this blog that we are in the difficult times, but I'd rather invest in equities than in bonds. Even though the world is in such a negative context these days, and it is therefore very difficult to be bullish on equities as they are in a secular bear market, for me it is even more difficult to be bullish on bonds. I think stocks are the best house in the bad neighbourhood as the saying goes.
Fred - Just as I said above, with the bond comment, the risk everywhere is that rates will rise. Look at what is happening in PIIGS countries first, than European Core second, and now France and Germany which are part of the G6. We could even have a mini spike in Japan soon. Yields did jump a little this week and Yen sold off. Downgrades are obviously in the pipeline here too! The whole developed world is in trouble. All investors will eventually figure this out and will be forced out of the government bond markets globally. Where is this capital going to go? I think we all know the answer to that question.
I also agree with you that there is no such thing as engineering economic landings or economic shift towards consumer driven GDPs. But I do know one thing, when we do have more troubles in the future and we will for sure, authorities always chose the quickest and easiest option - which is to print money just like in the 30s and in the 70s! Like I said above, bond investors will eventually figure this out. The question is at one point do Treasuries start acting like Italian or French government yields?
That is why commodities will do great, stocks will beat bonds in a money printing environment and bond / cash deflationists will be totally cleaned out! When capital starts leaving bonds, and it will eventually in coming years, it will have no place to run but towards sound currencies like Precious Metals or real assets like Agricultural Commodities like Sugar or Soybeans!