So What Is The Baltic Dry Index Telling US Now?

I last wrote on the baltic dry index was when I featured an article from CIMB on the sector: Featured Report: CIMB Says Dry Bulk Shipping To Fly

The BDI closed at 2534 last night.

And here is how the index is doing this year.



And clearly the index has been retreating since hitting the peak in June.

Now there's this article on the theaustralian called "Froth and bubble: dipping into the commodities rally"

• SO what is it: a bear market rally in commodities and resource stocks or just a temporary pullback in the new bull market run?
  
  It's rather a critical distinction: if it's the former, then late July may have been the peak of the rally and we're in for some difficult trading months; if it's the latter, then these dips are the time to be getting set for the next leg-up. Pick the right way and you'll be seen as a genius but get it wrong and the trading account balance starts looking terminal.
  
  The analysts are generally urging caution when it comes to stock portfolios.
  
  But not panic, or cashing out.
  
  A consensus seems to be building that there will be some sort of correction. But, unlike the generalised slaughter of late 2008 and early 2009, when many investors had their heads handed to them, the next downturn could be more discriminating. Any substantial reversal in metals prices will not only be matched by falls in resource stocks but probably send some sectors into a tailspin. But -- and this is important -- companies with money coming in the door (rather than going out) will withstand the buffeting better than the juniors with nothing more than high hopes and glossy PowerPoint presentations.
  
  The data is, at best, confusing. Take the first week of August as an example.
  
  On the one hand, there was copper selling at a price 90 per cent above what it was on January 2. Nickel set a new 2009 high in late July, as did zinc.
  
  On the other, the Baltic Dry Index -- the shipping index that shows us the health of the seaborne trade in bulk commodities by the prices shipping companies are able to charge -- had its worst week since October. ( Moolah: yes, isn't this very intreresting? For the folks that kept on saying that the bdi is a leading indicator, why is the bdi contradicting the markets? :p2 )
  
  And October 2008 was a very bad time for the BDI. Having risen to a record 11,793 the preceding May, the index plunged as the year ended, bottoming out at 663.
  
  By this month there were signs of some green shoots, but during the first week of August it took a 4.6 per cent hit, falling to 2772. That's a long way back from the December bottom, but even further from the May 2008 high.
  
  No wonder the recent Diggers & Dealers mining forum in Kalgoorlie was dominated by the subject of where this is all going. Delegates spent a good deal of time of fretting about whether this market rally in resource commodities had run too far, too fast. At the same time, scratch an investor and you'll probably find them obsessing about how they should have had the nerve to buy any time between December 2008 and last March, when everything looked like it was going to the dogs, and then subsequently ridden stocks that have doubled or trebled in value since.
  
  To buy now or not: that is the question to which everyone seemingly has a different answer. But it's not just the average punter who missed the bus earlier this year.
  
  David Thurtell, Citigroup's commodity man in London, says the professionals also picked up on the rebound too late.
  
  "It appears that most macro funds have missed the risk rally and are now buying in on the dips," he tells The Australian.
  
  "That's why the dips are so shallow."
  
  Thurtell adds that even in July he was hearing that some funds were still not buying the recovery story; others were in the market not out of conviction that commodities had turned the corner, but in order to retain clients who were bullish.
  
  The last time Wealth looked at commodities was four months ago, and the change of sentiment since then has been nothing short of extraordinary.
  
  Back in April, we were heartened by copper rallying to a six-month high and the firming oil price.
  
  But there were plenty of caveats then.
  
  There were warnings that the economic outlook was still grim, with contraction rather than expansion in the developed countries the more likely scenario.
  
  One analyst said the global outlook was so soggy that commodities were unlikely to catch fire; another tentatively ventured that "it could be a very good time to get in" because of the extraordinary injections of liquidity through central bank stimulus moves. No such chasm between opinions exists any longer.
  
  Analysts tend to agree there will be a pullback in commodity prices sometime later this year, but that 2010 is looking good. Really good.
  
  They differ only on timing for the correction -- sometime between now and December is the range -- and the extent of the retreat.
  
  Thurtell is on the low side, offering the prospect of about a 5 per cent correction in prices, but that is because his predictions for price bounces by 2010 have already come to pass. It is also based on his reading that funds are ready to pounce on any pullback.
  
  Others say it could be between 10 per cent and 20 per cent.
  
  Hartleys resource analyst Andrew Muir is convinced that there is a correction around the corner.
  
  He puts a pullback in the "more than likely category" because of the level of heat generated in the market during the past few months. "I don't see it being sustainable in the short term," he adds.
  
  Muir has also been struck by the fact that even while metal prices have been rising, so has the Australian dollar, a correlation that has taken a good deal of the gloss from those price rises. Gold hit $1546.70 an ounce on February 20, largely because of a decline in the local currency. But, at the time of writing just six months later, it's about $1150 an ounce. While all the base metals have risen in that time, the appreciating Australian dollar has trimmed off a substantial slice of the gains for producers here. ( Moolah: Ahh... the denominating currency is rather crucial when one buy gold, no? )
  
  However, says Muir, not many investors seem concerned about this trend. If that is the case, it's further evidence that a bull market mentality is taking over.
  
  Those who fail to learn from history are doomed to repeat it, goes the old saw. The problem with this ageless piece of advice is that when it comes to financial markets, it usually is "different this time".
  
  A few months ago everyone was googling the 1930s Depression to try to figure out how to prepare for deflation.
  
  You can bin that material because, as National Australia Bank analyst Ben Westmore points out, the commodity buying surge has been driven by renewed inflation expectations in the US.
  
  Commodities were bought as a hedge against currencies losing value.
  
  And Warwick Grigor at BGF Equities says the BDI and shipping rates may not always be a reliable guide to what is going on in the metals markets anyway.
  
  He believes the collapse in the BDI last October was not a reflection of demand for metals but had more to do with Lehman Brothers going to the wall.
  
  And Lehman Brothers was one of the big freight insurers. "For four weeks no one could get shipping insurance, but this was seen as 'no one wants anything'," says Grigor. And many a wrong decision may have been based on this misreading of the situation.

Oooohh... It's Squeaky Bum Time Again!

LOL! Don't you wonder when you see headlines like 'Buy Stocks Now .. if You Can Hold on for 3 Years"

• "Asian markets had a good run, valuations perhaps look a little rich, but if you take a three-to-five year view, I am fairly confident that markets will end on a higher note over that period and investors can make decent returns," said Menon on CNBC Asia's Protect Your Wealth.

Yeah I wondered to myself. "Valuations 'perhaps' look a little rich." Hmm.. the word 'perhaps' is sounding mighty huge now and most of the time, when experts says 'a little rich' I do note that they tend to under-estimate the situation and in such cases, 'perhaps a little rich' could very well mean 'extremely rich'.

LOL!

However since I am not an expert I could be wrong.

Anyway.... where are we?

So if valuations are a little rich... why can't we wait? Is waiting never ever an option for the stocks?

Yeah, Menon did mention 'for the next 12 months by gradually into the market'....

but... but... but.... if valuations is a little rich... why can't I wait?

Let's see, the EPL season has just started, and I could dabble with my fantasy league team, yes? That could be really fun, much fun than buying and praying that this would not be the start of the next big correction. (hey.. who is that bugger that said fbm klci could handle a 50 point drop? :p )

And I know I should be real worried when I see the next article!

Cramer: Is the 'Correction' Over?

Omigosh!

It's mad money time again!

LOL!

I like the last line... "Every argument the bears had for selling,” Cramer said, “has been totally rebutted by this great market."

LOL!

Market is always great when one winning money!

No?

So how now my dearest?

ps: how nice... fbm klci closed down 8.88 pts at 1155. Cantik or what? :P

Market Outlook For EEM: High Valuations Warning For Emerging Markets

On Bloomberg News: Emerging Markets Priciest Since 2007 When Shares Fell

• By Adria Cimino and Michael Patterson
  
  July 13 (Bloomberg) -- The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.
  
  The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium, the 22-country benchmark sank 54 percent in the next year.
  
  Groupama Asset Management, Palatine Asset Management and Standard Life Investments say the disparity means investors are paying too much for shares from China to India to Brazil at a time when the global economy is contracting. MSCI’s emerging- market gauge is valued at 1.7 times its companies’ net assets after a 34 percent surge last quarter, the highest on record compared with the MSCI World Index of 23 advanced economies, which trades for 1.5 times, data compiled by Bloomberg show.
  
  “Emerging-market stocks are at risk,” said Matthieu Giuliani, a Paris-based fund manager at Palatine, which oversees $5.56 billion. “You should only pay so much for growth.”
  
  Investors are already starting to show a lack of confidence in a continued rally. The MSCI developing-nation index dropped 8.3 percent from its 2009 high on June 1 through last week, while the MSCI World fell 7.4 percent and the S&P 500 retreated 6.8 percent. Emerging-market funds had $540 million of net outflows in the week to July 8, the second time in three weeks investors withdrew money, according to Cambridge, Massachusetts- based EPFR Global, which tracks funds with $10 trillion worldwide.
  
  Volatile Returns
  
  The MSCI emerging-market index declined 1.8 percent to 723.05 as of 4:58 p.m. in New York today. The MSCI World added 1.5 percent, while the S&P 500 increased 2.5 percent.
  
  All 22 emerging-market currencies tracked by Bloomberg depreciated against the yen in the past month, and 16 weakened against the dollar. The yen usually attracts investors during economic turmoil because Japan’s trade surplus makes the nation less reliant on overseas lenders, while the dollar benefits from its status as the world’s reserve currency.
  
  While developing nations’ economies grew an average 1.7 times faster than developed countries in the past 20 years, their stocks traded at a discount because their economies and returns were more volatile. Brazil’s annual inflation averaged more than 1,000 percent in the 1990s, and South Korea required a $57 billion bailout from the International Monetary Fund during the Asian financial crisis of 1997.
  
  Bull Markets
  
  The MSCI emerging-market index had 13 bull-market rallies of at least 20 percent and 12 bear-market declines of the same magnitude since its inception in December 1987, according to data compiled by Birinyi Associates Inc., the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi. That compares with five bull markets and four bear markets for the S&P 500 during the same period.
  
  Developing nations led the worldwide rally in equities last quarter, with China’s Shanghai Composite Index adding 25 percent and India’s Bombay Stock Exchange Sensitive Index jumping 49 percent. The gains outpaced a 20 percent rise in the MSCI World and a 15 percent advance in the S&P 500.
  
  The increase cut the dividend yield of the emerging-market gauge to 2.97 percent, compared with 3.49 percent for developed countries. MSCI’s emerging-market index fetches 1.1 times sales and 6.7 times cash flow, compared with 0.8 and 4.3 in the advanced gauge, data compiled by Bloomberg show.
  
  Record Share
  
  “Gains came too quickly in the context of a slow economic rebound,” said Romain Boscher, who helps oversee $119 billion as a director at Groupama in Paris. “Valuations are now high, and that leaves the door open for a drop. Emerging and developed markets are at risk.”
  
  Developing nations’ share of global equity value climbed to an all-time high this month as investors poured in a record $26.5 billion last quarter, according to data compiled by Bloomberg and EPFR.
  
  The infusion helped Beijing-based oil producer PetroChina Co. climb 17 percent in Hong Kong trading this year and overtake Exxon Mobil Corp. as the world’s largest company by market capitalization. PetroChina’s shares are valued at 11.3 times earnings, compared with 8.9 for Irving, Texas-based Exxon.
  
  PetroChina, which traded at a discount to Exxon as recently as April, is one of five Chinese companies ranked among the world’s 10 biggest by market value. The rest are in the U.S.
  
  Growth Premium
  
  Itau Unibanco Holding SA in Sao Paulo, Latin America’s largest bank by market value, trades at 2.7 times net assets, more than double the 1.1 price-to-book ratio for Banco Santander SA. The Santander, Spain-based lender got 33 percent of its net income from Latin America in the first quarter and is the world’s 10th-biggest financial company by market value.
  
  For Carmignac Gestion’s Eric Le Coz, emerging-market equities deserve a premium because the economies are the only ones projected to grow this year. Financial institutions in developing nations also avoided most of the credit freeze that caused almost $1.5 trillion of writedowns and credit losses since 2007, according to Bloomberg data.
  
  Le Coz’s firm is buying shares of Beijing-based China Construction Bank Corp., which trades for 2.5 times book value, and Bharat Heavy Electricals Ltd., the New Delhi-based manufacturer of power-plant equipment that’s valued at 31 times earnings.
  
  Not as Fragile
  
  The Washington-based IMF estimates developing economies will grow 1.5 percent as a group this year and 4.7 percent in 2010, while advanced economies will contract 3.8 percent in 2009 and expand 0.6 percent next year.
  
  Emerging markets “should be more expensive,” said Le Coz, who helps oversee $28 billion as a member of the investment committee at Carmignac in Paris. “In the past, emerging markets were fragile. Today that’s not the case.”
  
  Brazil, which defaulted on its foreign debt twice since 1983 and devalued its currency in 1999, now has an investment- grade credit rating from S&P and Fitch Ratings. Moody’s Investors Service said this month it may upgrade Latin America’s biggest economy.
  
  Chinese stocks are among the world’s best investments because the nation’s economic growth is poised to exceed forecasts, Barton Biggs, who runs New York-based hedge fund Traxis Partners LP, said in an interview on Bloomberg Television today.
  
  China surpassed Germany in 2007 to become the world’s third-largest economy. Russia has $409 billion of foreign exchange reserves and India has $253 billion, the world’s third- and fifth-biggest holdings, according to Bloomberg data.
  
  ‘Grave’ Prospects
  
  Developing nations traded at a discount to American equities from 2001 to 2006 even after their economies expanded at almost three times the pace, according to Bloomberg and IMF data. They moved to a premium in October 2007, the peak of a five-year advance that sent the MSCI gauge up fivefold. The index’s drop in 2008 was almost 16 percentage points steeper than the S&P 500’s 38 percent slide, the worst since 1937.
  
  When emerging-market valuations climbed above the U.S. in 1999 and 2000, it foreshadowed the end of a seven-year global rally. The MSCI developing-nation index sank 37 percent in the 12 months after March 2000, compared with a 23 percent slide in the S&P 500.
  
  The Washington-based World Bank spurred a worldwide sell- off last month after warning of “increasingly grave economic prospects” for developing nations and predicting the global economy will contract 2.9 percent this year, compared with a previous forecast of a 1.7 percent decline.
  
  Equities sank on July 2 as the U.S. government said the economy lost 467,000 jobs last month, 102,000 more than the median economist’s estimate.
  
  ‘Run Too Far’
  
  Emerging markets “are still dependent on exports and the health of wealthy countries,” Palatine’s Giuliani said. The European Union was the biggest export market for Brazil, Russia, India and China as of 2007, the last period the data were available, according to the Geneva-based World Trade Organization. The U.S. was the second-biggest market for Brazil, India and China.
  
  Shares in developing nations are the most vulnerable to further declines because prices “have run too far ahead” of a recovery in profits, according to Standard Life’s Jason Hepner.
  
  Profits Plunge
  
  Companies in the MSCI emerging-markets index that reported results since the end of the first quarter posted an average earnings drop of 92 percent, trailing analysts’ estimates by 14 percent, according to Bloomberg data. That compares with a 46 percent profit slide for Europe’s Dow Jones Stoxx 600 Index and a 31 percent fall for the S&P 500, Bloomberg data show.
  
  “We favor the more defensive markets like the U.S.,” said Hepner, an Edinburgh-based money manager at Standard Life, which oversees about $178 billion worldwide and has a “very light” position in emerging-market equities.
  
  While BlackRock Inc.’s Bob Doll projects developing-market equities will be the most attractive stock investments over the next few years, he says they may lead a short-term retreat as investors reduce expectations for an economic recovery.
  
  “A lot of risk assets are ahead of themselves,” said Doll, vice chairman and chief investment officer of global equities at New York-based BlackRock, which had $1.3 trillion under management as of March 31. “Almost always, what goes up the most, pulls back the most.”

In another article WSJ - Small Investors Pile into Emerging Markets, Junk Bonds, and Commodities

• Emerging Markets - aka decoupling all over again
  
  •Stock markets of developing countries like India and Brazil have gone through the roof since early March, reversing some of their declines from last year. The MSCI Emerging Markets Index is up about 34% for the first six months of the year, after losing 54.5% in 2008. Some niche markets have had wilder swings. Russia’s benchmark RTS index is up 56% for the year’s first half, after losing 72.4% in 2008. [May 24, 2009: NYT - As Economy Struggles, Russia's Market Has Surged]
  
  •What’s changed? Not only do investors have a greater appetite for risk these days, they’re also more optimistic about the economic outlook for some of these countries. In China, the world’s third-largest economy, the government’s massive stimulus is starting to take effect. While exports are still down, internal growth is gaining strength. Meanwhile, commodity prices have been on the rise, improving confidence in Brazil and Russia.
  
  •Despite hot performance for emerging-market funds so far this year—an average 33% return—some money managers say caution is in order. While they’re optimistic that emerging-market economies will grow at a much faster rate than the U.S. over the next several years, some worry about the recent explosive rally in these markets. “It’s been the lower-quality, the riskier companies that have done better this year,” says Simon Hallett, co-portfolio manager of the Harding Loevner Emerging Markets fund. “Emerging markets have probably overshot in the short term.”

Morgan Stanley too had something to say, US revival key to emerging market recovery: Morgan Stanley

• China’s role in the global economy is currently similar to that of the little Dutch boy who stuck his finger in the dyke to avert disaster. It is the only country where growth has returned to its underlying trend rate of 8% following last year’s economic meltdown. The demand impulse from China is now buoying exports and sentiment in several other economies.
  
  However, the boy could only stem the tide up to a point and fortunately other men soon arrived on the scene to fix the problem. As was the case in the Dutch legend, the global economy too needs the developed world to start contributing to world growth again for a broad-based recovery to materialise. And that in turn requires the US consumer to spend at least a small part of the stimulus funds pronto.
  
  Even China is betting on the US consumer making some sort of a comeback. While Chinese policymakers are indeed attempting to reorient the economy by encouraging more domestic consumption, such structural changes take a long time to pan out. Boosting infrastructure spending is the quickest way to shore up demand in the short-term and that’s what China has done over the past few months. A large part of the Chinese stimulus has gone towards increasing fixed asset investment even though investment as a share of GDP is already at abnormally high levels of more than 40%.
  
  China essentially remains the world’s main manufacturing base. And herein lies the problem with the global economic recovery story. It will be very difficult for China to maintain its 8% expansion pace if its export growth does not pick up by the end of the year as there’s a limit as to how much investment it can add to its already large and increasingly idle manufacturing base.
  
  The rise in economic optimism since March this year has largely been due to a turnaround in the manufacturing sectors in many countries, starting with China. Manufacturing activity that declined across the world by more than 15% in the year to March 2009 began to stabilise in the first quarter of 2009 with Asian countries taking the lead. Expectations rose that the snapback in industrial activity could be quite sharp as firms had aggressively cut production and their workforce late last year following the credit crisis.
  
  Some developing countries are indeed on track to post eye-popping growth numbers for the second quarter. Many Asian emerging markets probably recorded economic growth in excess of 10% on an annualised basis in the April-June 2009 quarter. For the developed world as well economists are projecting positive growth in the July-September quarter with the rate of inventory liquidation having peaked in the first half of 2009.
  
  Global equity markets were on a tear since March, tracking the sharp improvement in economic sentiment. But after pricing in all the positive developments on the global manufacturing front, the stock market rally stalled in June and is now showing signs of fading as the realisation dawns that any rebound in manufacturing activity may just be a short-term phenomenon if final demand does not resurface.
  
  Unfortunately, the news on the consumption front has been discouraging of late. It appears that the US consumer has used all the additional income from the stimulus packages to just rebuild the savings pool. The household savings ratio has risen from virtually zero in late 2007 to 6% currently. That’s a huge swing in a short span of time although it is still below the historical norm of 8%. No meaningful global economic recovery can shape up as long as the US consumer stays completely focused on increasing the savings ratio. After all, consumption drives growth, not manufacturing activity as the latter is undertaken only in anticipation of final demand.
  
  The most important data then to track in the weeks and months ahead are US retail sales numbers. While the US consumer is unlikely to return to the spendthrift ways of the past two decades for a long time to come, a modest increase in retail sales is now required to create some sort of a virtuous economic cycle. Over time, the US consumer needs to work off the excessive leverage and gradually increase the savings rate while the rest of the world makes the necessary structural adjustments to the growth model. In the long-run, final demand trends of the developed world will play a less significant role and the growth leadership has to be provided by the emerging market consumer. But decoupling is an incremental process and given the trade and capital flow linkages, developing countries cannot pull away from the developed world too far, too quickly.
  
  The decoupling theme staged some sort of a comeback this year after being derailed by the economic crisis in 2008. This is reflected in the relative performance of emerging markets versus developed markets: the gap between the indices of the two blocs is back at the levels last seen at the peak of the decoupling mania in late 2007.
  
  Equity market performance merely tracks economic sentiment on a real time basis and the large performance gap between the emerging and developed market indices indicates the differential in sentiment is stretched from a historical perspective. To be sure, there’s nothing to suggest that the differential can’t get wider. The valuations of stocks in developing countries are currently similar to those in the developed world after long trading at a discount and a case can be made that emerging market equities should trade at a premium as their future growth prospects are brighter. In the near-term however, it’s hard to justify much of a premium as the export dependency and the reliance on external capital to fund some of their growth is still high among many developing economies.
  
  Ironically, both the performance and valuation gap between the developing and the industrialised world could further widen in the coming months if risk appetite in the US and other developed countries rises. That in turn will lead to an even greater inflow of capital into emerging markets. For that to happen though economic optimism in the US must improve.
  
  It’s then all down to the US consumer to determine whether a global economic recovery gains traction by moving beyond the inventory rebuilding stage. If the US consumer remains in a funk and keeps on saving any additional income the world economy will at best follow an L-shaped economic path, implying that the cyclical bull market in equities is over. But even a modest revival in US consumer activity will be enough to create a positive feedback loop between production and consumption and extend the cyclical bull market in stocks till at least early 2010 when fresh challenges will emerge as the stimulus effects fade and excessive leverage in the system remains a drag.
  
  The bears argue that the consumer will keep on retrenching this year as the economic wounds of the past year are still raw and the debt overload high. They do have history on their side: it has typically taken around three years for the US economy to find its footing after suffering a major crisis. The first phase of the Great Depression lasted three years from 1929 to 1932. In a disturbing parallel, the stock market rallied by 30% in early 1931 as industrial activity seemed to be stabilising following a market crash of nearly 50% in the previous year. But the consumer deleveraging process continued unabated that subsequently took the economy and the markets for a deeper dive. Even during a mild recession in 2001 following the tech boom-bust cycle, it took till mid-2003 for consumer spending to accelerate despite industrial activity having bottomed in late 2001 and showing a rebound in early 2002.
  
  Of course, the difference this time around is that the world has never seen so much money thrown at a problem. The bulls are banking on that cash infusion to launch a sustained global recovery. China’s policymakers have already succeeded in stimulating their economy but beyond a point, it too needs the largest buyer of its goods — the US consumer — to start spending again. If that doesn’t happen soon enough, then the global economy faces the prospect a relapse.

Here's how EEM has been faring since December 2008.

Rather important. Compare this to postings made last month, Squeaky Bum Time For EEM and How Did EEM Fared So Far During Its Squeaky Bum Time?

Do also see the two contrasting view points made on emerging markets on the recent posting Market Outlook For Emerging Markets, where we have Mark Mobius being rather optimistic and fundamentalists like Claire Barnes acknowledging the deep concerns.

---------------------------------

Market Outlook For Emerging Markets

On the Edge Financial Daily: Mobius: Outlook for emerging markets remains positive

• KUALA LUMPUR: The outlook for emerging markets remains positive to their relatively strong fundamental characteristics and faster growth than their developed counterparts, says Mark Mobius.
  
  Mobius, who is Templeton Asset Management Ltd executive chairman, said on July 8 while some emerging economies contracted in early 2009, most are expected to return to positive growth by end-2009 or 2010.
  
  “In the face of the global economic slowdown, the major markets of China and India continue to record exceptionally robust growth rates. China and India are expected to grow by 8% and 6%, respectively, in 2009,” he said.
  
  Emerging economies are in a much stronger position to weather external shocks following the accumulation of foreign exchange reserves.
  
  The growing middle class in emerging markets is an important and strong contributor to growth, he added. Emerging markets account for more than 80% of the world’s population, providing them with a strong purchasing power and the ability to spend their way into growth. At the forefront are markets such as China, India and Brazil.
  
  Another area that is poised to support economic growth in emerging markets is investment, particularly in infrastructure.
  
  “This is another area in which we have seen governments boost public spending in markets such as China and India. More importantly, the current valuations of emerging markets remain attractive,” he said.
  
  In his assessment of the second quarter of 2009, he said emerging markets surged with the MSCI Emerging Markets index returning 34.8% in US dollar terms.
  
  Mobius said part of this return was due to weakness in the US dollar. A return of confidence in emerging markets, the desire for higher returns and the search for undervalued companies support the markets’ uptrend.
  
  Latin American and Eastern European markets were among the strongest performers during the quarter while most Asian markets also recorded strong double-digit returns.
  
  A rebound in commodity prices and stronger domestic currencies supported markets in Latin America. Asian markets continued to attract significant portfolio inflows allowing markets such as China, India and Thailand to outperform their regional counterparts.
  
  In Eastern Europe, Hungary returned 69.7% in US dollar terms in part due to a strong Forint. Poland returned 37.0% in US dollar terms, while Russia ended the quarter up 37.8%.
  
  Turkey was among the top emerging market performers with a return of 57.2% in US dollar terms. A stronger Rand led the South African market to end the three-month period with a 31.3% gain in US dollar terms.

Chart of EEM.

From Apollo Investment Management, Claire Barnes were rather cautious in her 2Q report despite her stellar fund performance. Here is a snippet from her comments.

• Three months ago we reported an abundance of quality/growth options at attractive prices. Many of the more promising participated fully in the market's surge. By end-June, we had net gains of 36%, 99% and 164% on the three stocks which we added in 1Q. Several leading companies report that they see no signs of green shoots, but have anyway doubled in price. Valuations are now much less compelling. We are back to carefully weighing the relative resilience and prospects of businesses for the long haul, against a backdrop of economic turbulence which we expect to continue, and possibly to intensify.

LOL!

How very true! Have we not seen it here? Despite the no signs of green shoots, some of them shares simply rocketed to the moon!

• Governments, disappointingly, have 'wasted a good crisis'. Not only have they thrown away unimaginable amounts of taxpayers' money, postponing necessary adjustments, and impoverishing future generations. Not only have they missed opportunities for intelligent reform and appeared to be victims of 'regulatory capture'. Not only have they flouted the established hierarchy of creditors, imposing unwarranted losses on the prudent, and distorted the allocation of capital. They have also failed to seize the opportunity to reexamine market fundamentalism, to lead intelligent debate on the appropriate goals of societies, and to forge a new consensus on effective moves towards a more sustainable future.
  
  Perhaps such leadership takes longer, and will emerge in due course, as adrenaline-fired weekly panics give way to consideration of the longer-term issues. The 2009 Reith lectures offered a worthy start to a necessary debate.
  
  We mentioned that the economic crisis may intensify. Papering over cracks serves only to obscure the necessity of remedial action while the problem gets worse. The patchwork of quick fixes will have unintended consequences. Crises in pensions, insurance, government finances, housing foreclosures, etc, may be visible long after their worsening becomes inevitable, long after they become impossible to avert - but long before they reach bottom. The same will at some stage prove true of energy resources, and environmental damage. The timetable for these is less forecastable: they could be decades away, but the possibility that they may intensify suddenly should be borne in mind. Planetary and bureaucratic overload, like military blowback, lend themselves to the models of catastrophe theory, and may reach tipping points with little warning.
  
  How to plan for energy and environmental contingencies, we are not at all sure. Fortunately, it seems likely that there will be better times to act. The stampede for inflation hedges may be premature (forced and voluntary deleveraging may outpace the printing presses for a while). Exchange-traded funds have made the establishment of long positions in commodities more convenient for many, and more investors now seem to be viewing commodities as appropriate for large asset allocations, changing historic price relationships. In John Hussman's phrase, it may be 'hard for investors to sustain a durable sense of doom about inflation risk', if we have a period of subdued prices or deflation meanwhile. Likewise for resource shortages: some 1970s analysis still reads well, but many market participants would regard three decades 'too early' (even if intended as a warning) as tantamount to being wrong. However, early warnings are valuable. Investor views on appropriate long-term strategies would be welcome.
  
  Meanwhile, the attempt to recreate the market economy of 2007 seems both doomed and foolhardy. Many industries will not quickly return to 2007 levels: some will never be the same again. We are wary of future predictions for most 'luxury', several types of retail and consumer goods (spending patterns may change for decades), the auto industry, many types of capital machinery, and construction equipment... among others. We nevertheless hold some shares in these sectors, if the risk-reward proposition remains reasonable, but many of our holdings are in other sectors where business is relatively predictable - supermarkets, fast food, consumer finance, aircraft maintenance, basic telecommunications - and life, for the time being, goes on.

Asia's Overblown Growth Hopes And A 20-Year Bear Market?

Stephen Roach was on a CNBC interview and here is some transcript from the video: Hopes of growth from Asia overblown: Stephen Roach

• Q: How are you mapping economic conditions from hereon for the second half of 2009?
  
  A: Demand remains subdued at a low level and the recovery call is a tough one. It is not that we won't have it, but it is going to be a choppy recovery with periods of improvement followed by periodic setbacks. It will be a little better than an L but a long way away from a V. The markets after having panicked late last year and early this year have recovered from the panic, but now they are going to be rangebound for a while, echoing the choppy pattern in global economy. Asia is very export led, so with that much demand from the developed world, I think it is going to be a lot tougher for Asia than what consensus think. The consensus has fallen in love with Asia as the new engine of the global economy. I think those hopes are overblown at this point.
  
  Q: For the Asian space what happens to external demand and hence growth might be a bit stifled is going to be the key challenge?
  
  A: The numbers are clear for developing Asia. Go back to the Asian financial crisis in 1997-98. Exports were about 36% of pan regional gross domestic product (GDP) in 2007. Just before the world fell apart that number was 47%. So the region has increased its reliance on external demand significantly. The bulk of the finished goods to come of this region do go to the developed world which is still in a rare synchronized recession. This will be a challenge for Asia moving into the second half of this year and looking well into 2010.
  
  Q: Where does this leave commodities and the commodity cycle? If your view is that we won’t get a very solid recovery from hereon, economically speaking, what does it mean for the commodity complex you reckon?
  
  A: I don't think we are in a depression. We are through the worst of the global downturn, although the recovery is going to be limited. I think the deflation call for commodity prices is largely behind us. We could see some normal ups and downs. These are obviously sensitive prices that trade both ways and have done so for a long time, but I don't see a pronounced downturn in commodity prices like we saw in the immediate aftermath of last crisis.
  
  Q: Give us your thoughts on what has been happening with China as a market because a lot depends on that by way of demand and where the market moves from here?
  
  A: The Chinese consumer is one of the big question marks in the global outlook. You are right to raise that as an issue. The Chinese want us to believe that they provide a lot of stimulus for internal private consumption. But if you look carefully at this four trillion Renminbi (RMB) stimulus package that was enacted last November, over 70% of it went to infrastructure and earthquake reconstruction, very little of it went to the Chinese consumer.
  
  Yes, they had a healthcare insurance bill that went through and expanded nationwide medical coverage. If you do the math, it works out to about USD 30 per year over the next three years for each Chinese citizen. So, it is not exactly giving consumers the confidence that they have a much of a safety net which will enable them to draw down excess levels of savings and starts stepping up as spenders. Same is true with social securities, pensions, unemployment insurance. Chinese families save because they are scared of future and current income prospects. Until they overcome those fears, I think the Chinese consumer is going to be missing in action.

Link to the video clip: http://www.cnbc.com/id/15840232?video=1167820563&play=1

Everyone's talking about China.

Professor Pettis latest piece rather interesting. Look at the size of the loan growth posted in his latest posting, China’s loan growth isn’t boosting my confidence in China’s “green shoots”

• Credible rumors suggest that new loans in June will hit RMB 1.2 trillion or more, as banks rush to inflate their quarterly loan numbers, just as they did in March, on the assumption that any cap in quarterly loan growth will be based on the previous quarter’s numbers. I would argue that new lending in 2009, running at 2 to 3 times the new lending over the same period in 2008, is not at all normal and is very unlikely to be healthy.

See also The China Accident Waiting To Happen To Every One Of Us, Would China Have A Debt Problem? and Andy Xie Calls It Speculative Inventory And NOT Commodity Stockpiling!

And John Mauldin features David Galland's summary of the June's Casey Report which features an interview with Neil Howe. Author of the book, The Fourth Turning. John Mauldin's outside the box is called A 20-Year Bear Market?. The following passages caught my attention.

• You don't need me to tell you that the United States and in fact the world are now facing a plethora of intractable problems. The world's former powerhouse economy, the U.S., is now the world's largest debtor nation – and by a wide margin. The nation has trillions in unpayable liabilities coming due on Social Security and Medicare, to name just two of many broken government programs weighing on the country. And our much vaunted democracy is increasingly dysfunctional – rotten to the core, truth be known – thanks largely to entrenched special interests and a voting public clamoring for their own piece of the pie, while trying to hand the bill off to somebody else.
  
  Meanwhile, the economy – despite rigorous jawboning by the government and its many friends in the large banking institutions -- is in serious trouble, with the housing market buffeted by tsunami-like waves of defaults, foreclosures, overvaluations, historic levels of personal debt, and tight credit that has left the U.S. government as the sole lender in many markets.
  
  Bernanke and his ilk may see green shoots, but what they're really seeing is the deep, green sea rising up once again to bury the economy.
  
  That's the bad news...........

• Most importantly, if Howe is right, this crisis is far from over. In fact, when I asked him where we are today on a scale from 1 to 10 -- with 10 representing as bad as the crisis will get -- he replied that we are at either 2 or 3. In other words, the worst is very much yet to come. And, per above, he expects this period of turmoil to take 20 years to play out. Thus, if nothing else, you may want to continue approaching matters of personal finance cautiously.

Massive Market Warning From Andy Xie Again

Blogged previously on 29 April 2009. Why This Is Still A Bear Market!.

With markets having a pretty impressive May 2009, many would have shrug off Andy's comments.

However, on yesterday's Caijing.com, Andy Xie has another editorial Tight Spot for Fed, Blind Spot for Investors

• A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.
  
  Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.
  
  When the least informed and most credulous get into the market, the market is usually peaking. A rising economy and growing income produces more funds to fuel the market. But the global economy is now stuck with years of slow growth. Strong economic growth won't follow the current stock market surge. This is a bear market rally. People who jump in now will lose big.
  
  Over the past three weeks, the dollar dove while oil and treasury yields surged. These price movements exhibited typical symptoms of inflation fear, which is complicating policymaking around the world. The United States, in particular, could be bottled in. The federal government's fiscal stimulus and liquidity pumping by the Federal Reserve are twin instruments for propping up the bursting U.S. economy. The fiscal deficit could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase by one-third the total stock of federal government debt outstanding. Such a massive amount of federal debt paper needs a buoyant Treasury to absorb. If the Treasury market is a bear market, absorption becomes a huge problem.
  
  U.S. Treasury Secretary Timothy Geithner recently visited China to, among other things, persuade China to buy more Treasuries. According to a Brookings Institution estimate, China holds US$ 1.7 trillion in U.S. Treasuries and GSE paper (about 15 percent of the total stock). If China stops buying, it could plunge the Treasury market into deep bear territory. If China does not buy, the Treasury market will get worse. But China can't prop up the market by buying.
  
  In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.
  
  This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging. It means central banks no longer determine Treasury pricing. American institutions and families are now marginal buyers. This switch in who determines price is shifting Treasury yields significantly higher.
  
  The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels. Future inflation will average more than 3.5 percent, I believe. Some policy thinkers in the United States believe the Fed should target inflation between 5 and 6 percent. The Treasury yield could rise to between 7.5 and 8.5 percent from the current 3.5 percent.
  
  A massive supply of Treasuries would only worsen the market. The Federal Reserve has been trying to prop the Treasury market by buying more than US$ 300 billion – a purchase that's backfired. Treasury investors are terrified by the inflation implication of the Fed action. It is equivalent to monetizing national debt. As the federal deficit will remain sky-high for years to come, the monetization could become much larger, which might lead to hyperinflation. This is why the Treasury yield has surged in the past three weeks.
  
  One possible response is to finance the U.S. budget deficit with short-term financing. As the Fed controls short-term interest rates, such a strategy could avoid the pain of high interest rates. But this strategy could crash the dollar.
  
  The dollar index-DXY has fallen 10 percent from the March level, even though the U.S. trade deficit has declined substantially. It reflects the market's expectations that the Fed's monetary policy will lead to inflation and a dollar crash. The cause of dollar weakness is the outflow of U.S. money, in my view. It is the primary cause of a surge in emerging markets and commodities. Most U.S. analysts think the dollar's weakness is due to foreigners buying less of it. This is probably incorrect.
  
  The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment. The Fed has released and committed US$ 12 trillion (83 percent of GDP) for bailing out the financial system. This massive overhang in money supply could cause hyperinflation if not withdrawn in time. So far, the market is still giving the Fed the benefit of the doubt, believing it will indeed withdraw the money. Dollar weakness reflects the market's wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse and make inflation self-fulfilling.
  
  The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.
  
  Oil prices have doubled since a March low, even though global demand continues to decline. The driving forces again are expectations of inflation and a weaker dollar. As U.S.-based funds flee, some of the money has flowed into oil ETFs. This initially impacted futures prices, creating a huge gap between cash and futures prices. The gap increased inventory demand as investors tried to profit from the gap. Rising inventory demand caused spot prices to reach parity with futures prices. Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.
  
  Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.
  
  Rational expectation theory discredited Keynesian theory and laid the foundation for Paul Volker's tough love policy, which jagged up interest rates and triggered a recession. The recession convinced people that the central bank was serious about cooling inflation, so they adjusted their behavior accordingly. Inflation expectations fell sharply afterward. The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems. As I have argued before, special factors made Greenspan's approach effective at the same. Its byproduct was asset bubbles. As the environment has changed, rational expectation theory will again exert force on the impact of monetary policy.
  
  Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.
  
  While inflation expectations are causing some in the investor community to act, the rest are betting on strong economic recovery. Massive amounts of money have flowed into emerging markets, making it look like a runaway train. Many bystanders can't take it any longer and are jumping in. Markets, after trending up for three months, are gapping up. Unfortunately for the last-minute bulls, current market movements suggest peaking. If you buy now, you have a 90 percent chance of losing money when you try to get out.
  
  Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.
  
  The return of funds flowing into property is even more ridiculous. A property burst usually lasts for more than three years. The current burst is larger than usual. The property market is likely to remain in bear territory for much longer. The bulls are talking about inflation as the bullish factor for property. Unfortunately, property prices have risen already and need to come down even as CPI rises. Then the two can reach parity.
  
  While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.
  
  This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride.
  
  Indeed, most people who invest in the stock market get poorer. Look at Japan, Korea and Taiwan: Even though their per capita incomes have risen enormously over the past three decades, investors in these stock markets lost money. Economic growth is a necessary but not sufficient condition for investors to make money in the stock market. Most countries, unfortunately, don't possess the conditions for stock markets to reflect economic growth. The key is good corporate governance. It requires rule of law and good morality. Neither is apparent in most markets.
  
  It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.
  
  Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn't hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.
  
  China's property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn't possible. Depreciation is, as the end value is zero.
  
  The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.
  
  If you are a speculator and confident you can get out before it crashes, this is your market. If you think this market is for real, you are making a mistake and should get out as soon as possible. If you lost money during your last three market entries, stay away from this one – as far as you can.
  

The Party Could Be Over Soon For Global Equities?

On Business Times: Global equities overbought, set to fall: JPMorgan

• Global equities overbought, set to fall: JPMorgan
  
  Published: 2009/06/05
  
  HONG KONG: Global stocks are "overbought" and are set to fall in coming months because recent signs of an economic recovery are not sustainable, JPMorgan Asset Management said.
  
  The fund management company, which oversees US$1.1 trillion (US$1 = RM3.50) of global assets, is "underweight" equities, Geoff Lewis, Hong Kong-based head of investment services told reporters in the city yesterday.
  
  "All markets look overbought in the short term," Lewis said. "Markets have gotten ahead of themselves after such a strong run. We'll see some sort of correction during summer months."
  
  The MSCI World Index has surged 43 per cent from a 13-year low on March 9 as investors speculated government stimulus efforts worldwide will ease the global economic slump. Companies on the gauge trade at an average valuation of 18 times trailing earnings, the highest level since December 30 2004.
  
  "History suggests that it takes four years for economies to recover fully following banking crises, though during the period we'll see pretty sharp rallies; we're still in one of those rallies," Lewis said. "Things are not getting bad as quickly, which is different from saying things are getting better."
  
  Lewis' views echoed those of Aberdeen Asset Management Group's Nicholas Yeo, who said on Wednesday earnings prospects couldn't justify a three-month rally in Hong Kong stocks. Hong Kong's Hang Seng Index has surged 63 per cent from a four-month low on March 9.
  
  Within equity markets, JPMorgan is "overweight" Asia-excluding Japan as China's stimulus policies give more confidence in an Asian recovery, Lewis said. Hong Kong stocks will also benefit from close association with China and increasing global liquidity, he said.
  
  Investors should buy Indian and Brazilian shares, as their companies are less dependent on exports for earnings, Aberdeen Asset Management Group said.
  
  "In India, rural demand remains very high," Andrew Gillan, who helps oversee more than US$25 billion in Asia for Scotland's largest independent money manager, told reporters in Taipei yesterday, preferring consumer shares. "These countries are almost isolated from what's going on elsewhere."
  
  Gillan said he favoured faster-growing emerging markets over developed nations, as Western developed countries were set back further by the financial crisis. India is the third-best performing stock market this year, while Brazil is ranked 12 worldwide, as equities rebound from last year's global rout.
  
  India, Asia's third-largest economy, expanded 5.8 per cent in the three months to March 31, while the US economy shrank at a 5.7 per cent annual pace in the first quarter.
  
  South Korean, Taiwanese and Russian stocks aren't favoured because "they are at the mercy of exports, even if the company is well-managed," Gillan said at a press conference in Taipei.
  
  Exceptions are stocks that pay good dividends, such as Taiwan Semiconductor Manufacturing Co. The world's largest maker of chips designed by other companies, among Aberdeen's top 10 shareholdings, said on February 10 its board plans to pay a cash dividend of NT$3 and a stock dividend of 0.5 per cent per share for 2008. - Bloomberg

And Jesse made some interesting comments: The Stock Market in Context with the Great Crash of 1929 - 1932

• The economic policy of the early post-Crash period was heavily influenced by what was later called Liquidationism epitomized by prevailing views of the Hoover Administration. The idea was that allowing companies and banks to fail as quickly as possible, in a relatively uncontrolled manner, was the appropriate response. This view is still held by the Austrian School of economics.
  
  The flaw in this theory would seem to be that the decline of a crash is not like a natural decline in a business cycle or a severe demand contraction, but the result of a precipitous collapse from a Ponzi-like monetary and credit expansion.
  
  One can argue this point, endlessly if they wish to ignore history and economic reality, but again we need to remember that the outcome in several other nations embracing this theory was the rise of militant, fascist political regimes in response to societal dislocations.
  
  Obviously the best cure is prevention, in not allowing monetary bubbles in the first place. Duh. But one has to play with the cards in one's hand, and not the hand they wish to have.
  
  But there is a lesson in this for our current 'cure' in that blowing yet another asset bubble from a monetary expansion, and little else, will not work. We ought to have learned this from the Fed's policy responses in 2003-2006 which led to the US housing bubble.
  
  Systemic reform and rebalancing is absolutely essential to a sustained economy recovery, and needs to be measured by an increasing median wage and a reversion to manageable income - debt ratios.
  
  The headwinds against this remedy from an outsized financial sector that in many cases has coopted the political process makes a sustained economic recovery less probable without a significant shock to the political and economic structures of the US at least. (do give the rest of the editorial a read. :D )

Is It A Good Option To Bet On The Emerging Markets?

Posted On The UK Telegraph: Emerging markets second wind blows in the face of short-term thinking

Here is a snippet of what's written..

• ...Perhaps not surprisingly, given the uncanny ability of many investors to buy high and sell low, that gloom marked a turning point. My observation that emerging market investors had given up hope along with half the value of their portfolios came within days of the start of a new bull market for these riskiest of assets. The MSCI Emerging Markets index bottomed out on October 27, and since then it has risen by 50pc.
  
  As investors have rediscovered their appetite for chasing returns in far-flung places, some markets have done considerably better than this. Brazil's Bovespa index is up more than 70pc since its October low, while Russia's RTS index has very nearly doubled since January. The oil price has risen by two thirds since Christmas Eve. The FTSE 100, by contrast, is up just 8pc since October. America's S&P 500 stands at the same level it did six months ago.
  
  A couple of weeks ago, emerging market investment funds had one of their best ever weeks, taking $4bn (£2.6bn) of new money. Since November more than $10bn has flowed into these funds compared with almost $50bn heading the other way out of developed market funds. "De-coupling", a vogue investment term a year ago but dismissed as wishful thinking six months later, is back in fashion.
  
  Three factors have driven this sentiment yo-yo. First, the Chinese government announced a massive 4,000bn yuan (£400bn) stimulus package in November, which fuelled hopes that other emerging market exporters could switch their attention from the cash-strapped West to the world's new consumer of last resort. Twenty years ago, two thirds of emerging market exports were to developed countries. Now about half goes to other emerging markets.
  
  Second, investors started to believe that Asia's banks were less exposed to toxic assets and so less vulnerable to nationalisation. More broadly, the high savings rates and government surpluses in the region suggested that emerging markets were actually a safer long-term bet than developed markets.
  
  Third, investors reacted to early signs that the worst of the global recession might be over by switching from safe but over-priced assets (such as government bonds) to risky but potentially rewarding investments like emerging market equities and commodities. The price of copper, a bellwether of global economic growth, rose by 40pc in the first three months of 2009.
  
  Can the rise continue? Overall, emerging markets don't look over-priced, having fallen from an average of 18 times earnings a year ago to just eight in October and about 11 today. But generalising about emerging market investments is dangerous when the outlooks for the Baltic states and China, for example, are so different.
  
  The valuations of the hottest markets are starting to ring alarm bells. China's Shanghai Composite index trades on a price/earnings multiple of 30 today, three times as much as it did six months ago. Brazil's multiple has jumped from seven to 19 and its government is intervening in the currency markets to prevent the real from appreciating too quickly against the dollar.
  
  Proponents of the emerging markets story argue that companies operating in the developing world should trade at a premium because of the greater growth potential in these markets. Per capita incomes in these fast-growth parts of the world more than doubled between 2002 and 2007 compared with an increase of less than 40pc in developed markets. Economic growth in high single digits is expected in countries like China and India, compared with falls in the industrialised world this year and then a probably anaemic recovery as rising taxes and a long process of debt reduction holds back growth. Even so, today's valuations leave little wriggle room should growth disappoint in any way.
  
  Two clear lessons emerge from the recovery in emerging stock markets over the past six months. First, when all around you are reading the last rites for a region or asset class, your antennae should start twitching. The best time to buy is when it feels hardest to do so.
  
  Second, investors should ignore the short-term noise and back the long-term investment case. When I wrote about the abandonment of the emerging markets thesis six months ago I noted that "the IMF's latest World Economic Outlook forecasts growth in developing Asia of 7.7pc, with China a bit higher and India a bit lower. These are rates the rest of us can only dream of as we head into recession."
  
  

Why This Is Still A Bear Market!

The following editorial is from Andy Xie, Bulls, not Bears, May End in Tears

• Stock markets have roared back since their early March lows: by April 17, the S&P 500 was up 23.7 percent, FTSE 100 16.5 percent, HSI 37.5 percent, Shanghai A 20.8 percent and Nikkei 26.3 percent. Even American banks, the epicenter of the financial crisis, are reporting good earnings. The U.S. president is talking about silver linings. Fed Chairman Bernanke is seeing “green shoots.” Japan just announced another fiscal stimulus package. The market is expecting a second Chinese stimulus. Suddenly, it feels like you must get in now or it will be too late.
  
  But this is a bear market bounce that will end in tears. What will bring it down will be the likely torrent of new issues. Banks that report good earnings and speak about recovery will probably try to raise massive amounts of capital, taking advantage of the market rally, to weather the long winter ahead. IPOs will swamp emerging markets. Money flowing from bullish investors will become the winter clothing for distressed banks and companies.
  
  Indeed, the placement torrent may have already begun, and this bear rally may end within a month or two. There could be another bear rally in the fall due to the encouraging economic news. That rally will end when (1) the economic recovery proves unsustainable and economic indicators dip a second time, and (2) inflationary pressures tick up, forcing central banks to tighten despite weak economic conditions. Asset prices will hit their final bottom, probably in the second half of 2010, when fiscal stimulus funds are exhausted and central banks are unable to print more money.
  
  In the beginning of 2009, I predicted a bear market rally in the second and third quarters. Revising that prediction, I now see two bear rallies in 2009. We are in the middle of the first. Private placements and IPOs will bring it down. Improved indicative economic news in the third quarter may spark another rally. In my previous article, I expanded my economic outlook to predict the second dip in 2010.
  
  Fear has dominated financial markets since the sub-prime crisis began in the summer of 2007. Rallies were brief, mere backdrops to deeper market plunges. The latest rally, in the past five weeks, has been the longest. As it went on, it pulled in more and more skeptics. But I sense desperation among the bulls. The other day a CNBC host in the U.S. nearly kicked out a bearish guest who expected “waves of financial crises to come.” When I told an acquaintance that Hong Kong property prices will drop substantially, he furrowed his eyebrows and said emphatically that Hong Kong people had holding power. Faith rather than evidence is what’s keeping the bulls going.
  
  But the big test for the market will come when companies begin to issue stocks for cash. It began with Goldman Sach’s US$5 billion offer of common stocks right after its ‘good’ earnings announcement. The odds are that other global financial institutions would do the same, all in the good name of repaying the government. (But if they are in good shape, why would they need to raise money to repay the government?) In emerging markets too, IPOs will begin soon, ending nearly two years of drought. IPOs are what emerging markets are all about, as their underlying economies are hungry for capital.
  
  When the IPOs hit the markets, investors should think about why businesses want to raise money. The global economy is unlikely to be strong in the foreseeable future. Businesses shouldn’t need capital to expand. The likely answer is that they are preparing for lean times ahead. I suspect businesses making optimistic noises in public are, in fact, still bearish about the future. As long as the market remains buoyant, they will take advantage of the opportunity to raise money. The supply of stocks will eventually overwhelm the market.
  
  The bull case is built on three assumptions: (1) the market decline is already deep enough; (2) the global economy is either recovering or about to; and (3) more government stimulus money is coming, should there be more trouble. The bear case rests on: (1) this is a debt crisis, the debt levels are still too high, and the global economy can’t resume growth until debt levels recede to normal; (2) the world economy is still shrinking, though at a slower pace; and (3) government stimulus can’t start another growth cycle as the global economy must restructure itself first.
  
  I am in the bear camp. The bull case is really based on comparing the current recession with other recessions in the past half-century. However, this is a once-a-century recession. The only comparable one was the 1930s Great Depression. For a new growth cycle to begin, two conditions must be met: (1) debt levels, relative to income, in consuming economies (U.S., U.K., Australia, Ireland, Spain, etc.) must return to levels prevailing two decades ago, and (2) the manufacturing export economies (China, Germany, and Japan, etc.) must become significantly less production-oriented.
  
  The debt crisis is far from over. Just look at the U.S. financial sector debt – the source of all problems in this crisis. It has not come down, despite all the talk about deleveraging. It stood at $17.2 trillion at the end of 2008, higher than $15.8 trillion in September 2007, when the crisis began. Even though it can’t borrow from the market like before, it is borrowing from the Fed and the government. How could we say that the crisis is over when the U.S. financial sector’s leverage hasn’t declined?
  
  The economic fallout of the debt bubble bursting is just beginning. By the end of 2008, households’ net wealth in the U.S. had declined by $13 trillion or 20 percent from its peak in 2007. U.S. property prices are still declining. The odds are that the value of all residential properties in the U.S. would decline by another $5 trillion or more before stabilizing. On the other hand, U.S. household debt has not fallen. It stood at $13.8 trillion at the end of 2008. For the first time since the 1930s, aggregate household debt would exceed the value of the property that households own in the U.S. Obviously, borrowing against property to fund consumption is no longer possible.
  
  Income prospects look very poor. Unemployment is rising rapidly in the U.S., Europe and Japan. As the credit-funded portion of global demand vanishes, the labor force behind it loses their jobs. As the unemployed curtail their consumption, the multiplier effect pushes unemployment even higher. This vicious cycle is yet to reach its natural peak. The impact of rising unemployment on demand may last through 2010.
  
  Many who argue for a bull case are actually hoping for another bubble. The thinking is that if enough people believe in the bull case, their money keeps it going, rising asset prices support demand growth, corporate earnings improve, and the bull case is validated. The hope for another bubble is widespread in the world today. Even policymakers are secretly hoping for another bubble. They all remember how good life was during the bubble. The crisis has weighed down on everyone’s spirits. It seems that “doing the right thing” is just too hard.
  
  Bear rallies emanate from psychological leftovers of bubbles. When a bubble stays around too long, most begin to view it as the norm. When the bubble bursts and the pain becomes unbearable, most pine for the “good old days.” Their collective action causes a rally that creates the illusion that the bubble has returned. But a bubble, after bursting, can never be brought back. If you blow air into a balloon with a hole, it can puff up if you blow hard enough but as soon as you stop blowing, it deflates again, to nothing.
  
  Governments and central banks are trying hard to stop asset prices from falling. The hope now rests on government bailouts. Interest rates are near zero and budget deficits are at scary levels. When inflation rises, it will close the door on more government bailouts. When the last hope is gone, asset prices will truly bottom. I think this will happen in 2010.
  
  Some argue, why can’t we revive the old bubble or start a new one? The problem is that after a bubble has lasted several years, its bust leaves so much rubbish around that a new bubble cannot take root. For example, high levels of existing debt make further debt growth difficult. Without debt, a new bubble would have no legs. The economy needs time to recover before it can support another bubble. If you are waiting for another bubble to bail you out, I am afraid it’s going to be a long wait.
  
  Human psychology is surprisingly susceptible to a collective change in mood. Herd mentality is a well recognized but unproven psychological phenomenon. A person is more likely to believe in something if people he or she knows already do. The safety-in-numbers behavior is often observed in the animal kingdom. While crossing the African savanna, migrating wilder beasts cross crocodile infested rivers together. The idea is that the crocodiles can eat only one wilder beast at a time. When many cross at the same time, only one will be eaten, and the rest can cross safely. It seems that many succumb to the herd mentality to handle risk in the financial world. Bubbles appear repeatedly in human history, despite the setbacks they cause, because the herd instinct remains deeply rooted in our brains and takes control when the environment permits.
  
  When wilder beasts cross a river together, the advantage is real. If they cross separately, they give more time to crocodiles to eat them. For this advantage to be realized, a herd of wilder beasts needs a leader, someone who begins the rush. The first one to go has a higher probability to be eaten. Hence, in this case, irrational behavior, though not advantageous for individuals, is good for the group. The evolutionary advantage of such irrational behavior for the collective well being is the reason it is so prevalent in the animal, as well as human, world.
  
  Similarly, some bubbles are actually advantageous for economic development. For example, the IT bubble created and perfected technology that is still benefiting the world today, even though those who invested in it lost their money. Those who thought IT would make them rich are like the head of the wilder beast herd, unknowingly sacrificing themselves for the common good. Most technology-driven bubbles are like that: good for the world but bad for investors. Joseph Schumpeter’s theory of creative destruction is about such bubbles. Because so many bubbles are not harmful, governments and central banks have taken a cavalier attitude towards it.
  
  From time to time, a huge bubble of productive assets builds up. In most cases its consequences are devastating. The global property bubble falls into this category. Derivative products – another class of unproductive assets – hid leverage behind the property boom and made it bigger than any other in history. The debt accumulated for building unproductive assets caused widespread bankruptcies (e.g. the U.S. in the 1930s), hyperinflation (e.g. Germany in the 1920s), or massive government debt (e.g. Japan in the 1990s). It takes a long time, and a productive debt bubble, to heal the wound.
  
  The pain so far is acute but not depression-like. The reason is government stimulus measures are helping businesses and households stay afloat despite their insolvency. As governments exhaust their fiscal and monetary firepower, they are trying to verbally improve investor confidence, hoping that asset markets will improve and economies will follow. Such verbal stimulus is indeed having an impact.
  
  For example, the U.S. government is conducting a stress test on the banks. The test is a scenario analysis, i.e. whether banks can survive the downturn under different possible scenarios. I am sure most banks would ‘pass’ the test with flying colors, but this is self-deception. The U.S. financial system is technically bankrupt. The strength of a banking system reflects the strength of the economy it serves. Just look at the balance sheet of the U.S. household sector. How could U.S. banks survive when so many of their customers have negative equity?
  
  Such confidence tricks are significantly impacting sentiment and financial markets, but they can’t reverse the trend. Property prices are falling and unemployment rates are rising across the world. Temporary euphoria in financial markets cannot reverse that. Reality will eventually extinguish the irrational euphoria. Once inflation rises, it will close the final door of hope – the government bailout. Interest rates can and will rise despite badly performing economies. Only then will asset prices truly bottom out.
  
  The false hope today may feel good but it only delays necessary reforms. It actually makes things worse. As governments spend money to revive the past, they won’t be left with money required to ease the pain caused by structural reforms in the future. The world is behaving like a bankrupt drug addict, spending welfare checks to feed an addiction. Once the checks are all spent, the addict has to go cold turkey to kick the habit.

ps: Estimates Of Economic Costs Of A Flu Pandemic

Hmm... with most global markets having had their huge rallies recently, would this be the catalyst for the next leg down that the bears are waiting for?