As I
have been telling friends over the last month, the markets will be more or less
like headless chicken before the Fed meeting at the end of this month. I still
think the Fed will likely do QE3, at this coming meeting or the next one, given
how weak the US economic numbers are. The only problem is that the numbers are
not bad to provide a complete political cover for QE3 yet. I would still
suggest an increased exposure to risky assets before the Fed decision next
week. However, the rally probably won’t last that long. It would be a good time
to buy more LT T bond and set up shorts of equities sometime in the next few
months.
Having finished
a 7 stop 22 day trip to China, I realize that China’s current economic
situation is much direr than the government headline GDP numbers or housing
prices would tell you. There is still room for infrastructure; for example,
most cities need subways, and a lot of them, and high speed rail could still
expand in some segments so that the speed is really all high speed (i.e., 200
miles / hour). But the speed and amount of investment probably won’t create much
growth from the already humongous investment level. We should have a little
bounce (but not that strong, and certainly much weaker than 2009 bounce, as I
predicted at the start of this year) in the second half. But the situation will
likely to be worse next year and much worse the year after in terms of headline
GDP numbers. China’s housing prices, stock prices, and many asset prices will
be sharply lower in the next decade.
