No Public Euronation

By Derek On January 11, 2012 Under Broker Notes, Post

Procrastination is opportunity’s assassin”  – Victor Kiam

Given a choice of good news or bad news most non-psychopaths would choose the former so let’s look at the good news first.

1)       Persistent signs of recovery in the US

2)       European issues well known and largely discounted by markets

The chart for the VIX is intriguing. There is also a lot of cash sitting on the sidelines. Individual investors took out appx $100 bn out of domestic equity funds in the US last year and hedge funds are mostly de-risked and cashed up. It is interesting too, despite the last two days of risk asset rallies, the 10 year yield is still at 1.96%. A lot of safe haven money is still parked in Treasuries and that could provide the powder for a stronger short term rally this quarter. However, all the good news has one thing in common: it is short term.

Longer term, however, my fears over China’s debt implosion causes the outlook to darken. The China Daily today reports that 75% of China’s airports are losing money. 135 out of 180 civil airports across the country survived on local gov’t subsidies last year. Sounds like overcapacity again in large chest thumping infrastructure projects that have spread across the face of the country like acne on a teenager. Despite these losses, the newspaper notes brightly, “…costs haven’t affected local governments’ enthusiasm for investing in airports.” When the money is free why stop the party? China is scheduled to increase its number of airports by another 1/3 by 2015. Let the music play, let the blood flow.

Much like Europe, China is ignoring or choosing to procrastinate dealing with rising threats to its economy. I think we can use a new term here as we watch euro champions Merkel and Sarkozy and their preference for procrastination over action: “Euronate.” They are “euronating” on any real chances for a solution. China has learned much from the west on how to use debt as the illusion of prosperity. Will they become the next “euronators”? More immediately, I don’t think there is a sense of urgency amongst investors either, concerning this growing problem. A few shock surprises to consensus bullish views on China could easily put a cap on market performance this year.


Our one-armed economist, Bill Belchere, writes today in Macro Matters the recent path of Asia’s trade cycle indicates the global bounce in manufacturing activity will fade and with it our current rally. He predicts the export cycle, “…which heavily influences the entire range of Asian asset prices, will continue to weaken through mid-2012 at least.” Bill points out the improvement in global PMI was totally driven by the US and, “Outside of the US, production and new orders declined for the 4th and 5th months in a row respectively.” We expect European growth to contract 1-2% in Q1 and this is Asia’s most important market. This leads us to believe Asia’s export slowdown should last thru the middle of 2012 but the contraction will be less severe than the Great Recession. So the equity rally fades and we are stuck in no-man’s land.


Hong Kong’s famously successful Ocean Park has unveiled plans for a new attraction, “Hong Kong Street.” This will feature “…old tenement buildings, vintage trams, an old clock tower, a rickshaw and a colonial police post.” Famously successful Hong Kong business man and Chairman of Ocean Park, Allan Zeman says, “Hong Kong has gone through so many changes and has torn down so many beautiful old buildings … we thought it was important that young people and tourists should experience the old Hong Kong.” To fully experience “old Hong Kong” and get me excited Allan would have to somehow also recreate a dome of clean air over the exhibit. My first visit to Hong Kong was 1985 and I remember actually being able to see across the harbor – and the harbor was a lot wider then. Recent analysis of Hong Kong’s air quality for 2011 shows that on some measures air pollution is “much worse” than just 5 years ago. The HK gov’t has long promised to fix this problem but the reality of living here, alas, has shown them to be “euronators” as well.



Derek Hillen, CAIA

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