Sunday, February 27, 2011

Sorry for the absence

Sorry for having missing for the last few months. The last few months have been quite busy for me. It looks like to continue this way in the near future. I will try to post more whenever I get the chance.

My view has changed  since late October last year. At a meeting of Boston investment professionals early last November, I have already argued for the bull case in equity markets. The double dip risk is not there any more, at least not that noticeable. 

Then I also mentioned that there will be some large downside volatility in Chinese markets in particular when China starts to be pressed to fight inflation, mainly from its stubbornness to largely fix nominal exchange rate. I will give another five years of high growth for China and then its growth rate is likely to drop much below 5%, say 2-3 %, from there. That does not mean that Chinese people will suffer that badly in living standard, because the consumption related sector should have higher growth rates than the overall GDP. If Chinese governance still keep the real interest so low for too long, China will have an even bigger asset bubble, e.g., another doubling in housing price. This is probably the most likely scenario. It is politics, not economics, that determines policies. So this may be a period to speculate cautiously and make a few bucks. But then the fate of future growth rate will be even more miserable, maybe for decades to come. The demographics will add a huge drag to the growth rate too. 

Housing will probably bottom out this year in the U.S. It may not take off, but capital loss risk will become much smaller after the summer. I sold my house in 2007 and have not bought one since. I will think about buying now. 

As long as emerging markets keep enjoying higher growth rates than the developed markets, capital will keep flowing to where the growth rates are higher. However, in the short term, EM probably will be forced to fight inflation, because they generally try to keep exchange rates a bit too low to gain export edge. That tightening, which is completely involuntary, will drag the market momentum that were trying to go higher. In the medium term, they are still attractive. In the longer term (e.g., beyond five years), they are vulnerable because they are probably all too dependent on the China story (think commodities), and will have trouble adjusting when China really slows down sharply in its GDP growth.