Friday, July 27, 2012

Headless chicken to the short term bounce

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.