Kan Urges Bank of Japan to Help Overcome Deflation

 

Kan Urges Bank of Japan to Help Overcome Deflation

 

Japanese Finance Minister Naoto Kan reiterated his call on the central bank to support an economy under threat from falling prices and a strengthening yen.

“We’ll work together with the Bank of Japan to take a comprehensive and powerful approach to overcome deflation,” Kan said in a speech in Tokyo today as parliament began deliberations on the government’s 92.3 trillion yen ($1 trillion) budget for the year starting April 1.

Since taking office on Jan. 7, the finance chief has said Bank of Japan Governor Masaaki Shirakawa can do more to buoy the world’s second-largest economy. The government’s options for more stimulus spending are limited after Standard and Poor’s cut the nation’s sovereign rating outlook this week.

“We expect the central bank to support the economy through appropriate and flexible monetary policy while maintaining close ties and exchanging information with the government,” said Kan, who is also deputy leader and economy minister.

Shirakawa this week said the bank wants to overcome deflation as soon as possible and it will adhere to the Bank of Japan Law, which mandates it closely work with the government.

The central bank last month introduced a 10 trillion yen credit program for commercial lenders after Kan said that Japan is in deflation and called for policy action.

Japan’s national debt is set to rise to 973 trillion yen by the end of fiscal 2010. Bond issuances may swell to a record 51.3 trillion yen in the year starting April 2011, following next year’s 44.3 trillion yen sales, according to the Finance Ministry.

“As outstanding bonds approach a high level, we will appropriately manage debt by closely communicating with the market, maintaining our stance for fiscal health and keeping investors’ trust,” Kan said. “Fiscal health is absolutely necessary to support sustainable growth.”
 

 

Last Updated: Bloomberg.com – Market News

.

BEAT DEFLATION (or INFLATION) WITH GOLD

 

Morgan Stanley: Beat Deflation (or Inflation) with Gold

 

Experts are divided on which threat is worse for the global economy, deflation or inflation, but gold is a safe bet in either outcome, Morgan Stanley said in a research note.

“Gold looks to be the investment area that provides significant upside under the inflation-rebound scenario and relative resilience in the deflation scenario,” Morgan Stanley said.

It could act as a “relative safe haven” in the event of spiraling deflation, the report said.

But if the wave of government bailout money eventually sends prices higher, “gold should be one of the best hedges for investors,” it said.

Gold has performed relatively well throughout the last nine years, even through the 2001 deflation scare, the report pointed out.

Market watchers remain at odds as to whether the ongoing financial turmoil will develop into an inflationary or deflationary environment.
Morgan Stanley thinks that government intervention will eventually manage to avert a multi-year debt-deflation spiral.

“Once policy action gains traction, growth and inflation will quickly return, with the risk of hyperinflation,” the report said.
Morgan Stanley’s investment strategy remains “patient, prudent,” despite their belief in the effectiveness of government intervention.

“We are still in capital preservation mode, but prefer cash as we believe bonds are already pricing in too much deflation,” it said.

“Looming inflation may keep gold prices high”, says WGC

Gold prices may continue to rise this year due to persistent threats over financial recovery of the developed economies and concerns over inflation. Investment in gold is considered as a safe hedge against inflation.

“Investors are worried about the price stability. The money supplied to the market in 2008 is posing threat of inflationary pressures. Investors, who do not believe that higher inflation will materialise, worry about the dollar outlook,” found the latest report from the World Gold Council (WGC).

Gold price rose for the ninth consecutive year in 2009 to end at $1087.50 (Rs 50,000) an ounce (28.3 gm), as against $869.50 an ounce at the end of 2008. The average gold price rose 11.5 per cent to $972.35 an ounce in 2009 from $871.96 an ounce during the previous year.

Recovery in the global economy, especially in countries like India and China, is also likely to boost jewellery demand. However, jewellery was not a primary source of support for gold prices in 2009. Investment flows, dollar-hedging, inflation protection, and buying by central banks propelled the yellow metal to successive new highs, the report added.

The global economy began to show tentative signs of recovery since the second half of the year 2009. The pace remained uncertain. While some developing economies, like China, seem to recover at a healthy pace, their developed counterparts, in particular the US and Europe, are still far from returning to a “normal” rate of growth.

“Gold is money; therefore a hedge against inflation and deflation”

Warren Buffet one of the world’s most successful investors apparently once said the following about gold:
“It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.
It has no utility. Anyone watching from Mars would be scratching their head.”

Well, Mr Buffet let me attempt to explain to you and the “Martians” why this is so, as well as correct your statement (If it was your statement) that it has no utility.

First of all, gold is money; it is not like other commodities that we use mostly in production, consumption etc. One of money’s main functions is to store wealth. We therefore earn money, we hoard it, we guard it and then we exchange it for assets when needed.

Gold is the premier store of wealth that this world has known for the last 3000 plus years. Even the fact that gold is not the official currency in the countries of the world has not changed this fact. I know of no place in the world, now or many years before, where gold is not known and not highly valued.

So in summary, gold is money and it derives its usefulness from being money and therefore people dig it out, melt it down and guard it like they would guard money.

Inflation, Deflation or Just Gold ?

The whole inflation versus deflation debate is actually much less important to me now that I understand the role of Gold. Gold protects against financial and fiat currency instability and a loss of confidence in “the powers that be.” It is Gold’s time to shine as an asset class during this Kondratieff Winter, whether the Dollar does a Prechter deflationary death dance higher first or a straight Sinclair inflationary flop down to the 52 U.S. Dollar Index level (from the 75 close on Friday). People who only see “Dollar Up, Gold Down” and vice versa are missing the bigger picture. All global fiat currencies are sinking together, just at different rates. It is simply Gold’s turn as an asset class. Cycles. Greed. Fear. Gold will be a lousy investment again in 5-10 years, but it’s WAY TOO EARLY in the cycle to be worried about “the” top in Gold. Wake me when we get to $1500/oz. and I’ll be happy to revisit the issue (with another bullish commentary about how the next stop is $2,000).

So, whether its deflation or inflation or both, Gold is going higher. This a confidence issue and a secular cyclical phenomenon. “Gold good, stocks bad” is a trend set to continue.

Having said this, I still enjoy the inflation versus deflation debate. From a practical standpoint, as Martin Armstrong has said (see below), big money that moves currency markets can flow almost anywhere in the world to find a safe haven. In the early 1930s, capital flowed into the United States once the major economies like Britain and Switzerland abandoned the Gold standard, causing a crisis in confidence in these previously “good as Gold” currencies. This global flow of capital into the U.S. Dollar caused our Dollar to rise in relative value, aggravating the natural state of deflation we were experiencing at the time.

Naturally, Europeans sought the safety of a foreign currency backed by Gold once their own currencies were aggressively devalued by discontinuing their respective Gold pegs. In fact, if the United States stuck to its guns, it probably would have lost all its Gold to the hoards of paper note-bearing European souls looking for real money. American citizens followed suit and traded their notes for Gold (benefit of a true Gold standard: no commissions or premiums!) – these evil Gold hoarders of course had to be stopped and/or punished. Gold was thus confiscated from American citizens (with safety deposit boxes at times watched by officials to prevent clandestine Gold ownership) and the American Gold standard was finally weakened to help break the cycle of Gold loss and deflation. An overnight 69% currency devaluation ($20.67/oz. to $35/oz.) and the criminalization of private Gold ownership in the United States (ending a “true” Gold standard period in this country) was all it took. As destructive as they were to confidence and people’s savings, these Roosevelt mandates helped fuel a weak reflationary cyclical general stock bull market (1933-1937 was not a weak cyclical bull market for Gold miners, by the way).

Will we repeat a 1930s deflationary “collapse” scenario? Will we have a major currency event? Though deflationary forces are strong due to real estate and banking/credit/debt fiascos, confidence in the Dollar is low. The world’s greatest debtor nation has not inspired much confidence in global market participants seeking a safe haven. And I am not talking about bear market currency rallies here, I am talking about the dominant long-term trend.

Will Bernanke and his U.S. Treasury lackeys finally destroy the last shred of confidence in Uncle Buck with their idiocracy? Will capital flow into or out of the United States when the next wave of the global crisis occurs? Again, not talking about dead cat bounces here, talking about the dominant long-term trend. Global capital flows have more control over the fate of the Dollar (and every international currency) than Ber-spank-me, but Benny’s actions can certainly cause some of our creditors to figure out sooner that it may be better to walk away and simply write off their bad debts. Whether you’ve chosen sides on the inflation/deflation debate or not, this debate does allow you to recognize the nasty war of fundamental forces that is sure to cause further economic chaos in any scenario.

Me, I see further capital flight away from many financial casinos/markets around the world coming. I see a further loss of confidence in bankstas, Wall Street hustlers and paper magic notes designed to explode. I think some of this global money will be seeking a safe haven in Gold. I am not talking massive amounts of money, as Gold is a small market. I am talking about a few more “elephant” investors (i.e. governments, large private institutional funds) around the world deciding to up their physical Gold insurance from 1% to 5% of their portfolio. That’s all it would take to start/continue a big move higher in the Gold price from current levels.

Gold is safe, it is reliable, it requires no government assurances or bail-outs to stay in business, it does well when there is little confidence in the system and it is not debt-based. These are all things you want during a contractionary secular bear market in general stocks and real estate. Sure, governments can try to further tax or even confiscate Gold (again), but the government historically gets too tyrannical in trying to tax or confiscate all kinds of personal property at this stage of the economic cycle (including stocks and real estate). This is hardly a unique problem for those who take the plunge with Gold, despite paperbug concerns. At least Gold can be held quietly “off-ledger” until more rational minds prevail (this is not as easy with stocks and real estate).

In fact, if the government does “ban” Gold or tax it more excessively than it already does, nothing could be more patriotic than to completely ignore such a decree as a moral act of civil disobedience. By the way, if anyone in officialdom is reading, I sold all my Gold last year and this is just an academic intellectual exercise designed to make sure Americans follow everything their mama guvmint sez by pointing out the insanity of messing with Big Brother, who is all-knowing, all-powerful, and should never be disobeyed. I am a paperbug after all, I swear.

I believe the global paper fiat system is breaking down. I believe people will increasingly trade their paper for Gold regardless of whether we undergo deflation or inflation. After a 20 year bear market from 1980-2000, Gold ain’t done after a 4 fold gain. Has everyone forgotten how paper fiat market bubbles and Gold manias work?

I suppose that the economic events of the 1930s or 1970s, both inducing Gold and Gold stock manias, could not possibly happen again. Ever. 40 year intervals (if this is, perhaps, say a normal repetitive cycle) would put us at the 2010s for a new Gold mania, but Gold is dead as an asset class forever. Gold will never again have a serious bull market. Oil can go up 14 fold in 10 years but Gold couldn’t possibly go up even 10 fold in the same rough period (which would put us at $2500/ounce). The last bull market in Gold on a fiat paper system took Gold prices up 24 fold in 9 years ($35 to $850). The S&P 500 went up 16 fold from 1980 to 2000. This time, a 4 fold gain over a decade in a hated asset still considered worthless by the mainstream crowd is a bubble mania waiting to pop any second and take the Gold price back to Prechterite levels?! No sale, sorry…

I believe $2,000/oz is a minimum conservative upside target for Gold and it wouldn’t shock me to get to $10,000/oz. Until the Dow to Gold ratio gets below 2, I wouldn’t even consider that the Gold bull market might be over. We’ve got a long ways to go. Ignore the short-term noise and the paperbugs. Forget the $25-50 swings. Sit tight and be right.

China on Path to Become Second-Largest Economy in 2010

 

China on Path to Become Second-Largest Economy in 2010

BEIJING – China announced Thursday that its gross domestic product in fourth quarter 2009 grew by 10.7 percent year-on-year, up from a revised growth rate of 9.1 percent in the third quarter. China’s economy is surging forward even as many other nations, including the United States, are still trying to punch through the global recession.

Over the whole year, the Chinese economy grew by 8.7 percent, surpassing the 8 percent growth-rate benchmark that Chinese leaders assert is necessary to maintain social stability. If China keeps up that growth rate, it will likely replace Japan as the world’s second-largest economy by the end of this year.

The National Bureau of Statistics also announced Thursday that industrial production in December grew by 18.5 percent and retail sales by 17.5 percent. The December consumer price index rose by 1.9 percent and producer price index by 1.7 percent.

China says its economy expanded by 8.7% in 2009, exceeding even the government’s own initial expectations.

The pace of change increased as the year went on, with growth in the final quarter of 2009 increasing by 10.7% from 2008.

It is a major turnaround for an economy that was hit by the global downturn just a year ago.

‘Right direction’

China’s GDP announcement was made by Ma Jiantang, head of the National Bureau of Statistics.

He said China had faced “severe difficulties” in 2009, but its economy has now recovered and is moving in the right direction.

Annual growth was only slightly down on 2008.

But Mr Ma played down speculation that China’s economy had now overtaken Japan’s.

“According to the UN standard – that is $1 a day – there are still 150 million poor people in China. That is China’s reality,” he said.

“So despite the increase in our GDP and economic strength, we still have to recognise that China is still a developing country.”

These latest GDP figures have exceeded the target set by the Chinese government, the BBC’s Chris Hogg in Shanghai says.

This is a turnaround because China, like other countries across the world, was hit by the economic crisis during late 2008 and early 2009. Factories closed and workers were laid off.

China’s economy recovered with the help of a massive government stimulus package and now there are signs it is expanding too quickly.

 

by BBC NEWS and New York Times — Updated: Thursday, January 21, 2010

.

 

 

 

 

.

China sets 7.5 trillion yuan of credit supply targeted in 2010

 

7.5T yuan of credit supply targeted in 2010

HONG KONG: Authorities have set the target for the credit supply in China in 2010 at roughly 7.5 trillion yuan ($1.1 trillion), said Liu Mingkang, chairman of the China Banking Regulatory Commission.

Speaking at the Asian Financial Forum here on Wednesday, Liu said regulatory authorities would continue to control the pace and amount of credit supply this year

“Though the first few days of January this year witnessed a relatively strong and quick lending momentum, that is because of the lagging effect of last year’s credit buildup,” he said.

“Such trend will definitely be eased as the effective demand is satisfied,” he added.

Credit supply in China totaled about 9.5 trillion yuan ($1.4 trillion) in 2009, with monthly bank lending averaging 1.52 trillion yuan ($222.5 billion) in the first quarter but falling back gradually to normal levels in the following quarters.

Credit played a primary role in supporting the massive infrastructural investment. Rapid credit buildup also stabilized the market confidence, eased liquidity stress and boosted the economy, Liu said.

Liu said prudential measures were taken at the credit hike in the first quarter of last year, adding that regulatory authorities had asked banks to heighten their vigilance against any possible embedded credit risks.

Liu said he expected challenges for the Chinese banking industry in 2010.

“The year 2009 might be the most difficult year of the Chinese economy. 2010 could be the most complicated year with uncertainties,” he said.

Nevertheless, Liu said he did not expect the exit strategy to be a huge challenge for China because no money had been spent to rescue the financial industry.

“The real challenge facing China and other Asian economies is how to readjust their structure,” he said.

www.chinadaily.com.cn – Updated: Thursday, January 21, 2010

.

BofA Merrill Lynch Tells Investors to Raise Equity Allocation

 

BofA Merrill Lynch Tells Investors to Raise Equity Allocation 2010

 

The Research Investment Committee from BofA Merrill Lynch Global Research raised its asset allocation from 60 percent to 65 percent, while reducing its weight in bonds to 30 percent from 35 percent.

The committee is also maintaining its 5 percent weighting in cash for the moderate investor profile.

The firm is advising that long-term investors should always sell hubris and buy humiliation, adding that equities are a humiliated asset currently.

”Ten years ago the Asia crisis humiliated both emerging markets and commodity markets: an ounce of gold was worth less than $300 an ounce, the oil price was below $30 a barrel and the free float market cap of the entire Chinese equity market was about 3 percent of the peak market cap of Yahoo,” the analysts the RIC stated.

The RIC stated that it continuing to recommend that individual investors still have considerable home-country bias and that they need to have higher global allocations. The committee is recommending that investors have a benchmark weighting of 45 percent in North American equities.

U.S. large cap oils are being called an actionable investment topic by the RIC with analyst Doug Leggate saying that investors need to focus on stocks that favor a greater revenue from oil-related activities rather than those that focus on natural gas.

The RIC sees the oil sector as a whole as attractive right now, but picking the right stock in 2010 will be the key.
“Simply put, there has been a dramatic shift of balance sheet risk from the corporate to the government balance sheet,” the RIC stated. “It is no surprise then that our strategists forecast equity returns to surpass bond returns in the next 12 months.”

 

by StreetInsider.com

.

.

UPDATE: World Bank Economist Warns Of Global Economic Double Dip

 

UPDATE: World Bank Economist Warns Of Global Economic Double Dip

(Updates with additional comments)

 

WASHINGTON -(Dow Jones)- The World Bank’s chief economist warned Thursday the global economy may suffer a double-dip recession.

“The foundation for the recovery is very fragile,” Justin Lin told the Council on Foreign Relations.

“We may have a double dip,” he said, citing excess global capacity that could linger until 2014.

Beyond the weak economic fundamentals underlying the emergence from recession, Lin said he is also concerned that the world economy is entering “uncharted waters.”

In an environment of low interest rates and excess capacity, most of the liquidity could go into speculative investments, he said.

Other risks are that banks continue to hold bad debts on their balance sheets, as well as an potential rise in protectionism, said Lin.

While rising debts from fiscal stimulus is also a concern, it will only become an issue if the spending doesn’t boost productivity, he said.

Countries should ensure their stimulus is enhancing productivity, and possibly even consider a second round of stimulus, he said. That is more practical for emerging economies, since high-income countries are limited in their ability to boost productivity and low-income countries don’t have fiscal space.

Lin also reiterated his call for advanced economies to help finance stimulus in low-income countries, saying that funneling money where the economic bottlenecks are the greatest would help lead to a more sustainable global recovery.

“It’s important to find possibilities to channel more funds from high-income countries to help low-income countries to make investments in productivity enhancing projects,” he said.
 

by Dow Jones Newswires

http://www.foxbusiness.com/story/markets/updateworld-bank-economist-warns-global-economic-double-dip/

.

.

Breaking news : Fed Must Raise Rates as Economy Improves

Breaking news : Fed Must Raise Rates as Economy Improves

Fed’s Plosser, who will be a voter on the Fed’s policy-setting panel, repeated his view that the Fed should raise its target federal funds rate before the jobless rate — currently at 10 percent — has returned to “acceptable levels.”

“I believe the Fed will need to withdraw the extraordinary amount of liquidity it has provided to the economy and begin to raise interest rates as the economy continues to improve and financial markets return to more normal operation,” he said.

NEW YORK (Reuters) – The U.S. Federal Reserve will have to raise interest rates as the economy improves or risk losing the public’s confidence in its commitment to keeping inflation low and stable, a top Federal Reserve policy maker said on Tuesday.

Charles Plosser, president of the Philadelphia Federal Reserve Bank, said expectations for future inflation are currently “well-anchored,” but warned that there is “considerable uncertainty” clouding the outlook for price pressures over the next two to five years.

Plosser, known as an anti-inflation “hawk,” reiterated that Fed policy must be preemptive, in remarks prepared for delivery to the Entrepreneurs Forum of Greater Philadelphia.

As monetary policy works with a lag, officials need to consider what the inflation outlook will be and how the economy will look in 2011 and beyond, he said.

Plosser said the Fed should end the MBS purchase program by the end of March as planned.

“I believe it is important that we do so, and reduce our participation in this market, so the private market can once again resume a significant role. It cannot do so as long as the Fed is the dominant player,” he said.

If the Fed’s purchases were to continue it would “risk delaying the return to normal market functioning,” he said.
 

 

update via Yahoo! finance

 

.

Obama Plans to Raise as Much as $120 Billion From Bank Fees

Obama Plans to Raise as Much as $120 Billion From Bank Fees

Jan. 12 ( update news via Bloomberg) — President Barack Obama plans to impose a fee on banks expected to raise about $120 billion in order to help recoup losses from the Troubled Asset Relief Program, according to an administration official.

The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who request anonymity.

The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
 

.

Fed’s Hoenig says must tighten policy sooner rather than later

Fed’s Hoenig says must tighten policy sooner rather than later

Thu Jan 07, 2010

“Gold slipped on Thursday after reaching a three-week high above $1,140 per ounce the previous day,
weighed down by investors’ caution ahead of U.S. non-farm payrolls data.
The non-farm payrolls data is expected to shape expectations for when the U.S. Federal Reserve will start tightening its ultra-loose monetary policy, which could set the direction of the dollar.
In a similar vein, Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, gave a speech today in which he emphasized the importance of the normalizing interest rates sooner rather than later.”

 

WASHINGTON — The Federal Reserve should start tightening monetary policy — spelling higher U.S. interest rates — “sooner rather than later,” said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, on Thursday.

“The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal-funds rate target from zero back to a more normal level, probably between 3.5% and 4.5%, and restore its balance sheet to pre-crisis size and configuration,” Hoenig said in a speech at the Central Exchange in Kansas City.

Hoenig will be a voting member of the Federal Open Market Committee, the panel charged with setting interest-rate policy, this year.

The Federal Reserve should tighten policy sooner rather than later to contain longer-term inflation pressures and avoid sowing the seeds of the next crisis, a top Federal Reserve policy-maker said on Thursday.

The U.S. and world economies appear to be in the early stages of recovery, Federal Reserve Bank of Kansas City President Thomas Hoenig told a conference at the Central Exchange in Kansas City. In the U.S., labor market conditions have begun to stabilize and the housing market shows signs of recovery, he said.

“While there is considerable uncertainty about the outlook, the balance of evidence suggests that the recovery is gaining momentum. In these circumstances, I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later,” Hoenig said.

“We cannot afford to be short-sighted,” he said.

The Fed cut its benchmark federal funds rate to near zero in December 2008 and created a host of emergency lending facilities and bought mortgage-related to fight the worst recession in more than 70 years. It has pledged low rates for an extended period.

“If we leave it (the fed funds rate) there too long, then we will invite a new set of instabilities or inflation,” Hoenig said in response to an audience question.

Hoenig, who is seen as one of the more hawkish, or anti-inflationary, policymakers at the U.S. central bank, and is a voting member of the Fed’s rate-setting committee this year. He has warned about the risk of keeping interest rates too low for too long before, including in a speech last October.

“Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment — not today, perhaps, but in the medium and longer run,” Hoenig said.

Most analysts don’t expect the Fed to raise interest rates until the second half of 2010.

Hoenig also argued that keeping short-term interest rates near zero could actually hurt the recovery process in financial markets.

With a low federal funds rate and a small spread between the discount rate and the rate paid on excess reserves, banks are more inclined to transact with the Fed instead of with each other. That prevents the interbank markets from working effectively, Hoenig said. Low rates also distort longer-term saving and investment decisions, he added.

“While I agree that unemployment is unacceptably high and short-term inflation risks are likely small, we must also recognize what monetary policy can and cannot do,” he said. Monetary policy is not an appropriate tool for addressing structural unemployment problems, Hoenig argued.

The Fed’s tough task as the economic recovery gains traction will be to curtail its emergency credit and financial market support programs and “raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration,” Hoenig said.

by The Reuters Breaking News

 

.

Dollar strength could be the next story of 2010

 

Dollar strength could be the next story of 2010

 

It’s turning out to be a quiet — and tiring — end to the year for equities, a year that ironically saw one of the biggest rally seen in recent times. Stocks in emerging market economies as well the developed world including the US have seen a sharp rally from the March lows when markets bottomed out in the wake of the financial crisis.

According to Kirby Daley, Senior Strategist at the Newedge Group, markets may now “drift down quietly” till the year end though there may not be a sell-off. “We remain sceptical on the markets globally, and also of the sustainability of the economic recovery if the government stimulus is withdrawn,” he said.

Daley added that the recent strength seen in the US dollar against a basket of other currencies may continue and could be “the story of 2010”. That may be come as bad news for emerging markets and commodities as it is generally perceived a weaker dollar tends to be better for these asset classes.
Here is a verbatim transcript of an exclusive interview with Kirby Daley on CNBC-TV18. Also watch the accompanying video.

 

Q: Do you think the market weakness is linked to the snapback in the dollar or is there something else driving it?

A: It’s just a general wind down to the end of the year. I do not think there is any impetus after the strong performance of markets overall this year to rally into the year-end. I think the rather the more logical scenario was people to take some profits, take some money off the table and I expected a very quiet drift into the new year and it looks like that’s what we are getting. There is a lot of conflicting news out there, some positive economic signs – they can be interpreted both ways.

Until investors come back fresh in the new year getting new perspective we are probably unlikely to see any major swings in markets. I do not think that there is anything overwhelming negative that’s going to spark a sell-off but I do think that the markets are a bit tired after the excessive run that they have had.

 

Q: How high would you rate the outside chances of a sharp cut because through last week a couple of Asian markets like ours actually lost quite a bit?

A: The risk is to the downside. The investors need to be aware of that even though we probably are unlikely to see any major move that doesn’t mean that there couldn’t be shock to the system whether it’s geopolitical or whatever the event maybe that could spark an event. There is a far higher chance of something sparking a large sell off in most markets then there is if any good news coming out would cause a rally that it would get away from investors. So as a trader or investor you need to keep that in mind. The risk is far more to a downside sell off than to any type of a rally upwards from here.

 

Q: You have been slightly sceptical of this entire up move. What is your sense going into 2010, economic reality will catch-up with the market and that will cause a possible double dip or do you sense that this entire liquidity picture is still too strong and now possibly a shift from the dollar to yen financing again may keep markets propped up?

A: I do remain sceptical and I do think that while we may see some continued investment flows through either the dollar carry trade or maybe some people trying to throw on more of the yen carry trade as well. That is something that could keep markets from moving to the downside as quickly as they should in my view to adjust the fundamentals. I do believe and expect that looking at the market dynamics and the follow of good news versus bad news that we have had and what is likely to come as some stimulus programmes start to wind down and some of the Fed’s buying programmes in the US if they go off the books as scheduled in the next few months – there will be some major shocks in the system.

Hence, I do remain highly sceptical of the ability of the markets in the US and globally to continue this recovery path without the strong hand of government help behind them. The big unknown is if we are going to have stimulus in the US. After we get through the healthcare situation, I believe that the focus will be in the US on very short-term pumping the economy as much as they can. What happened to the USD 787 billion stimulus from last year – I am not sure they are going to talk much about that. They are going to talk about new programmes, efforts to get employment going to pump the economy for the elections coming fall in the US. So fundamentally these economies are not ready to take off on their own. We are likely to see a new round of health from governments in the US and possibly around the world and then it’s anyone’s guess as to how the markets are going to react to that.

 

Q: If there is a sharper rebound in the dollar index though what kind of impact do you think it might have on emerging markets like ours?

A: The dollar story is interesting and it is natural in my view whether you believe that this recovery is real and the Fed is going to begin to tighten some how enter and exit strategy and that would be dollar positive – that’s the tailwind behind the dollar whether you believe that risk aversion is coming back like I do that economic reality is going to come to the surface and show that this recovery is not real. Even if that means the Fed won’t be able to tighten the risk aversion trade coming back will be a tailwind behind the dollar.

We should see the dollar continue to strengthen for a while. I think the danger for emerging markets is less the play in the dollar itself and more in the fact that if we do see risk aversion come back we are likely to see outflows from emerging markets because they have been massive beneficiaries of the risk appetite trade that’s gone on and this is something that we have discussed here many times. I hate to repeat myself but there is not much new to the story. Emerging markets have gained a lot of inflows that would likely come out if risk aversion is take hold again in 2010 while it benefits the dollar.

If a currency story will emerge in 2010, it will be potential competitive devaluations. A lot of areas protectionism and self interested policies will come to light as we see that the global economy is far more fragile than we think will probably be the story for 2010 and emerging markets, Asian economies and how their governments react to currency policies is going to be a big driver of trade and a potential global recovery or second stock.

 

Q: Do you think some of this recalibration or risk aversion might come back on the table as early as the first part of 2010 itself or will it hit us somewhere a little bit later?

A: I was far ahead of myself thinking that risk aversion was going to come back in summer and then again in the fall. It’s possible it will eek back in the first quarter of 2010. It’s unavoidable by second quarter of 2010 that we see risk aversion coming back.

I believe the key to this is healthcare. Once we get pass healthcare in the US, policymakers there will begin to admit the realities especially from the administration, admit the realities that this economic recovery may not be as strong as they had let us to believe. We are going to need some more help from the government and that will cause inventors. We can get through some kind of healthcare solution during that time. It’s very politically driven.

 

Q: For 2010 what is the asset class or the market to enter?

A: I believe that 2010 will be an adjustment for equities. The easy trade in equities is done even if you are a believer in this recovery. The recovery does continue either through government stimulus or magic. I have missed all along either way equities have priced in a pretty robust recovery that we are unlikely to get and even if we get it there shouldn’t be a whole lot of relative upside in equities.

We are going to have to look as we move back into risk aversion again at potential opportunities in the bond markets and then as inflation makes its way into the system due to massive monetisation of DEPT printing of money that we know of may not be a 2010 play maybe later. However, investors need to position themselves into hard assets, commodity linked assets and that doesn’t necessarily mean buying a long-only commodity fund, exchange-traded funds (ETF) or fund index. Looking at opportunities in the commodity space as a potential hedge against inflation, but that is further off, not immediate. It can walk you way in those investments again. Equities are likely underperform in 2010.

BY CNBC TV18
.