Enzio's Clock

Have a look at a rather innovative way of conveying our view: the video is short and sweet. 

Here is yesterday's show. Have a look at the free notes, too. 

Also see our show notes that we released yesterday.

Further to today's CNBC show, I read this morning that market pundits are clutching at straws when it comes to the U.S. market: this is what I mean by "long of commodities. Meanwhile, according to Citi, AIG wants to raise $5 bn - 10 bn in order to avert a credit rating downgrade: this is what I mean by "short of reputation". See our show notes posted yesterday, and view the video.

-- Oil prices spiked to a new record above $129 a barrel, fuelling fears of
inflation and its impact on consumer spending and corporate profits. What is
your outlook on HK's April CPI out at 1615 tomorrow?

· April’s annual inflation rate will exceed 4%

· Food as well as fuel prices are the headline drivers

· The other one is that the ever-weaker dollar is driving up “imported” inflation: we have to pay more HKD per unit of Australian dollar as well as Euro. The ever-stronger Euro, for instance, is driving up the costs of clothing and footwear imported from Europe

· This increase in fuel prices is terrible for transport-related companies. Indeed, bus fares have been hiked, but as these hikes have to be approved by our Executive Council, the government does not allow the bus companies to pass on fully the fuel cost rises

· Meanwhile, airlines like our Cathay Pacific have the constraint of fighting particularly with European airlines, so Cathay cannot just pass higher fuel costs on, either: with the bulk of their income in Euros, European airlines are paying “less” for fuel than Cathay is

-- HK Q1 GDP grew 7.1 pct year-on-year, versus 6.7 pct growth in the previous quarter. Growth in the first quarter exceeded economists' consensus forecast of 6 pct. What is your outlook on the HK economy?

· According to The Economic Clock™, The Economic Time™ in Hong Kong is characterised by an

o Excess supply of money, and by an

o Excess demand for goods

· However, with inflation eating-away at peoples’ incomes, view this as a macro tax hike. This means that disposable incomes shrink.

· Besides, we for one do not believe that the U.S. sub-prime mess is over by a long shot.

· Nor is The Economic Time globally so great

· Add to this China’s current woes, and our outlook is not bright – nor is it dim

· The “props” will remain fixed asset investment and government consumption

· The “drags” increasingly will come from weaker, although still robust private consumption (which drives up inventories), and weaker exports. Indeed,

-- Inflation in China reached 8.5% in April, all but ending the Government's
hopes of containing it to the 2008 target of 4.8%, this coupled with more
inflation worries following the devastating earthquake in Sichuan on May 12.
How would China's inflation affect HK & the rest of Asia?

· Before I answer, it is vital to understand the nature of global inflation: it is of cost-push nature -0heralding stagflation

· So, inflation is driven primarily by

o A weaker dollar, fueling America’s import costs

o Rising agriculture prices, thanks to La Nina and previous planting policies, and

o Rising metals and minerals prices, fuelled by strong, sustained demand from India and China, but also by supply issues – ranging from the policy of the oil cartel to mining strikes in South Africa that drive up the price of platinum

· The same story applies to China.

· As it is costs, not demand, that are driving inflation, the government – the Central Bank – cannot do a great deal

· Yes, it will allow the RMB to keep rising against the dollar, in order to contain imported inflation – but remember that the RMB is not rising so strongly against other currencies such as the Euro and Australian dollar!

· I am less concerned about how China’s inflation will affect the rest of Asia; of greater concern is how its poorly-performing stock market will affect sentiment in Asia (see next)

n Anything else you want to highlight?

n Picking up on my last point: corporate profits in China a threatened by two “gales”

o First, rising costs that cannot be passed on. This applies particularly to oil refiners, but also to airlines faced with global competition, and

o Secondly, companies are having to face increasing losses on their stock portfolios

n This “double header” will crimp companies’ ability to create jobs or indeed make more fixed assets investments

1. Corporate earnings results in Asia so far - what are they telling you?

· I don’t follow these closely, so cannot add value at a micro level.

· While I do believe that domestic demand is a more powerful than when I arrived in Asia back in the mid eighties, I disbelieve the wishful thinking of “de-coupling.”

· This means that with America slowing, that infects Asian exporters, and that, in turn, infects domestic consumer psychology in Asia. So my guess is that going forward, Asian profits will be more subdued, albeit still showing growth.

2. Asian markets have been making stabs at coming back - what signs are you looking for before you give Asian markets a clean bill of health?

· This reinforces my point just made about the myth of de-coupling. The simple fact is that when America roars, Asia roars. And when America snores, so does Asia.

· Thus, once America starts turning sour again on account of her dreadful Economic Time™, her stock market tremors will be felt in Asia yet again.

· While overall, The Economic Time is fine in most of Asia (excluding Japan), our markets out here move very similarly to American markets. That won’t change….

· All the more so once markets finally grasp that America is staring at the jaws of stagflation…

3. Where do you see markets going hereon - which sectors do you favour – and which shows most promise when markets make a comeback?

· As I remain bearish on America’s Economic Time, I would be very conscious of markets here. In other words, this is not “buy and hold” time

· Yes, Asian markets will not plunge as much as America’s, but they are linked at the hip

· Thus, I would go for defensive sectors such as consumer staples, shorting exporters and financials (subprime messa solemnis, etc)

5. Where should investors be putting their money and your advice on asset

allocation strategy - would you still say to hold cash?

· Cash remains king, particularly in non-dollars

· We remain commodity fans, particularly of platinum and gold

6. Any topics you like discussed.

· We have ranted on since 2006 about America’s looming stagflation. Just today we read that Alan Greenspan is warning of a long, hard recession…The weaker dollar propels import costs, then you have higher commodity costs and lower productivity (which drives up unit labour costs). Finally, with everyone now agreeing that there is an “excess supply of goods” in the diction of The Economic Clock™, no growth + inflation = stagflation…..

· Not great for markets, going forward. – and certainly not for long bonds!

Also see our free show notes!

See our show notes.

See our show notes!

See free show notes!