Thursday, September 29, 2011

Some clarifications on longer term forecasts

In response to people’s question about point 4 in long term forecast, I wrote:

China faces a fork in the road when it slows down. The entrenched interest may keep or grab more wealth, but that will make China either a Latin American countries in the 70s with government terrorism or have a revolution. Or the entrenched interest may step back and start the inevitable transition process and share some of the wealth with the rest of Chinese people. Now the GDP growth is 9-10%, of which investment grow at 13-14% whereas consumption grows at about 7%. In transition, say investment grows at 0% and consumption at 7%, that would make the overall 3-4% GDP growth. So if consumption is largely growth at similar speed like before, people would not notice as much on that aspect. The pain though will still be inevitable because China’s problem is structural. All the resources, especially people, will have to be relocated to service from export and investment driven industries. So lots of people will lose their jobs. The transition would need government monetary and fiscal policy to help.

In response to people’s question about HK vs. Mainland housing bubbles, I wrote

Yes, both will suffer in the longer term. It may be a 10 or more year downward adjustment. HK could have big downward adjustment because it is not only exposed to Chinese economic growth, but also US interest rate. So you could say that the real interest rate today in China is 0; both normal interest and inflation rates are about 6%. But the real rates in HK is about -4%: its exchange rate system require a peg of nominal rate to the US at 0% (due to the impossible trinity concept that I discussed at the BCIC meeting last Nov) while having about 4% inflation rate. So it is a housing bubble on steroids and could even worse than China. When either China slows down or US recovers some, its housing market may have worse adjustment than China. Of course if a lot of Chinese money gets scared in mainland, they may escape to HK to buy something here. That might provide some support from below.

Friday, September 23, 2011

On the money so far and longer term (5 year forecast)

Setp 8
To share my two cents about the near term, we will have sharp ups and downs. Some actions (QE3 or 2.5) from the Fed at the end of both Sept and Oct will probably hold the market around the current levels (could be up by more than 10%) till Nov. However, we are likely to have a recession toward the end of the year or at the start of next year, and that is when the big market tank will likely happen. I also attached my longer term predictions (5 year) at the very end. If we are patient enough, most, if not all, will pan out in a few years.

Aug 4
If you still remember that I mentioned that we will have another deflation scare latter this year at our dinner during your visit to Boston this spring, it is now in full force. It will probably last at least until after the third quarter when the Fed could have more political capital and will to do QE3 (The risk of US severe recession is still not too high though). In the meantime, which is still at least a couple of months ahead, we will have rocky downward market with sometimes sharp rallies. We should see a repeat of risky asset rally (globally) when the Fed finally comes out with QE3 again. It is opportunity to be had when that happens. 
Longer term forecast
n  China will face sharp slow down in growth in five years (say from 10% to 3%) for many years to come
n  Related emerging markets and commodity producers will suffer as well.
n  HK’s housing price will drop substantially
n  Chinese people may not suffer in their satisfaction
n  The world will not come to an end with the slowdown in China’s growth
n  Eurozone will not survive in the current form
n  The U.S. will become stronger in relative terms if it can get the political act together