“It is said that beliefs alter facts. Perhaps a fitting corollary here is perceptions alter Investment Themes. The investment themes of last week or last month that were so bullish for stocks suddenly seem not to be so bullish. This confirms their transient nature.”
Commentary & Analysis
Japan slowdown and linkages …
China has been busy cracking down on anyone they suspect might contemplate re-enactment of the protests now playing out in the Middle East. The Thought Crime Division is working overtime, surely adding more points to the GDP. Word has it (snuck out by carrier pigeon) the Rehabilitation Division is also looking for a few good men to man Room 101. It‟s spawning yet another Chinese growth industry in the midst of lagging unemployment everywhere else. Isn‟t State capitalism just grand?
I make the point of the disappearing Chinese to suggest that China‟s eye may be focused a little less on the growth ball in the near-term, and if we add in the Japanese seemingly inevitable slowdown a la the dual disasters there, just maybe it leads to a ratcheting down on the commodities love for a bit…an excerpt from Morgan Stanley research note:
…but supply chain disruptions may cause more harm. It is quite likely that Japan’s share of global trade alone understates the potential impact of the events in Japan. The fragmented nature of the global supply chain – a reflection of increased „vertical specialisation’ – is likely to amplify any direct effects. For example, a Japanese auto manufacturer may produce many components of a car in Japan, but have its final assembly plant in China. If the production of component parts in Japan is disrupted, the final assembly plant in China may be affected. This, in turn, would affect China’s exports to countries like the US. Hence, China’s exports might suffer through two channels: the reduction in exports to Japan itself plus reduced exports to other destinations due to the disruption in Japanese intermediate goods production.
Copper—gotta love it! But is there a big expectations gap here? (chart next page)
Of course China is fighting that inflation thing, but finding it much harder to make that disappear than your average local dissident. But trying they are, with hikes in reserve requirements (likely meaningless in the modern banking system; not to suggest China‟s banks are modern; they are much more than that; they are the models of State Capitalism. You may have noticed the huge profits recently turned in there, as reported by our illustrious financial media. Hooray!! Allocating capital based on political efficiencies just ain‟t the same as doing such on mostly market efficiencies. Interesting the booming non-performing loans on these banks isn‟t talked about. Maybe because these so-called banks are nothing more than conduits from the politburo that is designed to keep the music playing despite attempts to clamp down on rising prices. Of course this is probably all Ben‟s fault, say the Cheerleaders.
It is a dangerous game.
But, it‟s “all good” as long as the Chinese continue to take wealth from the consumer to support the giant holes in conduit balance sheets; and as long as the powers that be continue to fight a transition to more consumerism instead of over-investment (which is once again the natural choice if it turns out Morgan Stanley is correct that Chinese exports will decline thanks to Japan. The Chinese Treadmill continues to turn…
So maybe there could be a change in expectations in the commodities market. John Ross thinks a lot of the story is due for some reflection instead of pure self-feeding mindlessness (to which I think we can all plead guilty at times; emotions do that to us no matter how hard we try).
This is from a recent issue of John Ross‟ Commodities Essential newsletter:
Price trends are becoming founded on ideas that overplay and outlive whatever fundamental rationales might exist, ideas driven by a “speculative disorder.” So, when fundamentals stop being the primary driving force, we need to find ways to explain ongoing price action.
Like the Boom/Bust model and many other interpretations of price cycles, below is a diagram from a book called Market Semiotics, by Woody Dorsey, laying out the behavioral finance perspective of investment trend cycles.
Where are commodities (and most other risk assets for that matter) along this path?
Mr. Market as usual will let us know once he hands us the gift of hindsight. But instead of accepting that Japan will snap back and have no big effect on the global economy, maybe we should think about that for a minute or two before accepting that very transient theme.