Enzio von Pfeil Gets "It" - Do You?

Discussion in 'Wall St. News' started by ByLoSellHi, Apr 7, 2008.

  1. I disagree with him that ALL commodities will continue to run. I expect to see a broken spine in metals sometime after the Beijing Olympics.

    Other than that, spot on.

    US and Asia Still in for a Downturn
    by: Enzio von Pfeil posted on: April 07, 2008

    Excerpts from Dr. Enzio von Pfeil's recent appearance on CNBC Asia:

    1. Alcoa (AA) kicks off the earnings season in the US, can we expect any positive news from corporate America or is it all bleak?

    * As you know, I am a macro-economist. So, I cannot comment specifically on company results. Thus, here are some broad observations.

    * The Economic Time™ has been worsening in America for about two years. We expect stagflation to start grabbing headline attention.

    * In such an atmosphere, the real economy is characterized by an excess supply of goods. That, in conjunction with rising import costs stemming from a lower dollar, means that many US firms are in for reduced turnover and reduced margins, ergo reduced profits. Thus, brace for dramatically lower earnings of some companies. These will constitute one of "three triggers and a funeral," a more recent piece of ours.

    * The only ray of hope is the earnings of price-sensitive exporters who are beating their European competition on price in markets with good economic times, such as China or, increasingly, Taiwan.

    * The other sector that could provide robust earnings is "service staples" such as health care, if massive productivity gains have been recorded.

    2. What kind of trickle effect will we see from any negative news on Asian stocks / economies?

    * The key is that "de-coupling" is a myth.

    * The key link is psychological. When US markets fall, everyone gets scared globally, so the sell-off continues. This will dampen consumption in Asia as discretionary consumption is very much driven by the feminine "feel-good" factor.

    * Then there is the "real economy" link. With America's consumption faltering, why should Americans keep importing goods from Asia? This reduction in the activities of Asian export manufacturers means layoffs/slower wages growth.

    * Finally, with the dollar slump continuing, expect to see more imported inflation in places that are tied to the USD, such as Hong Kong. Also, expect weaker currencies in politically-wobbly places like Thailand. Meanwhile, those economies with strong currencies will have to re-structure their export bases in order to remain price-competitive.

    3. The financials are expected to report weak numbers. Do you expect any shockers in the sector?

    * Yes. In the jargon of The Economic Clock, America is undergoing an excess demand for money: banks are not getting funded and are scared to lend. Fear has overtaken greed.

    * Add to this the pernicious effects of the "financial accelerator," whereby leverage and the house of cards built by derivatives implodes, and you are in for a mess.

    * Besides, out here in Asia, there will be credit-card issues that are similar in character to American banks passing the hot potatoes of sub-prime mortgages.

    * Curiously, electronic securities firms will thrive off increased market volatility, while pedestrian lenders and over-leveraged/staffed investment banks will falter. Investment banks' borrowing at the Fed has rocketed since they were allowed to do so on March 17.

    4. The US payroll number is down 80,000 – and the reaction in Asia trade is looking pretty negative.

    * Markets currently are rising. It smacks of people still clutching at straws in the hope that "things are improving." We are committed bears, so we disagree.

    * The bigger shock will be in the financial sector, specifically other banks needing bailouts, or indeed in the drama of shockingly awful corporate earnings outlooks. Then there is the whole issue of banks having to de-leverage.

    * Traditionally, it is such numbers, not "real economy" ones like payrolls data, that create market volatility.

    5. Which Asian market/sectors may be insulated from a downturn in the US?
    * We are bulls of Taiwan, particularly of their tourism and transport sectors.

    * Food distributors should prosper, particularly if they distribute specialist foods like a certain type of rice or other grains.

    * Electronic brokers who have low overheads and no leverage should do extremely well off the rising market volatility.

    6. Central banking week - BOJ, ECB, BoE, BOK - Any surprise rate movements?

    * Japan. The most interesting phenomenon is political tussles in Japan. It seems like the opposition Democratic Party boss, Ozawa, is keen to engineer a re-election of the Lower House, so he wants to be seen as constructive. Thus, it is likely that his party will agree to Mr. Shirakawa becoming the President of the Bank of Japan. I do not foresee any interest rate drama: after all, what would a rate cut do at such low levels? Japan equates to a dead hippo in financial terms.

    * US. Now that everyone is singing the "R" word, including shadow Fed Pres Greenspan, I wonder when the "S" word - stagflation - will start being chanted. Again, would rate cuts really help? When Central Banks tighten, their mindset is on policy. But when private sector banks tighten by not lending, their mindset is on profits. Germany and Japan needed four years to clean up their balance sheets - consequently, their markets plunged by 40%!

    * ECB. Tough call. Those countries with specialist capital goods exports, like France and Germany, are thriving. Those with commodity-like, price sensitive exports, like the Mediterraneans, are faltering. I don't think that Trichet will keep raising rates. But since his sole mandate is to fight inflation (as opposed to the Fed, which has a double-barreled mandate of fighting inflation and supporting growth), he won't cut rates for some time.

    7. Oil has been gaining more ground - will the commodities run continue?

    * I expect commodities to keep running up. Limited supply and increased demand from our new neighbours such as India and China are key.

    * Besides, with the Middle East remaining a policy disaster, the Straits of Hormuz – specifically oil shipments – remain under threat.

    * On the soft side, the invasion of ethanol fuels, coupled with higher incomes generating the demand for higher quality foods are themes to keep an eye on.