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Senin, 12 September 2011

GREED & fear - Euroquake potential - CLSA

· Switzerland’s desperate move this week to target the Swiss franc against the euro at a rate of CHF1.20/€ marks a central bank giving up all formal pretence about inflation targeting. The Swiss move can also be interpreted as a move towards currency wars. This raises the larger issue of whether such currency moves will be followed sooner or later, as history suggests, by capital controls and trade wars.

· GREED & fear’s advice to investors remains to prepare for more deflationary risk aversion during the often turbulent months of September and October. Last week’s US employment data has certainly increased the odds of QE3. The continuing weak employment in the US reflects a structural problem more than a cyclical one.

· America is showing growing signs of following the path Euroland has long trodden; though without the Euro-style welfare state to fall back on. The lack of such a European welfare state remains to GREED & fear a relative positive for America rather than a negative. But it does raise the issue of how America can re-generate itself. One possible area where lower paying jobs can revive in the next five to ten years is surely in the manufacturing sector.

· The stock market will remain extremely vulnerable to further evidence that cyclical momentum is slowing in America. For GREED & fear the critical point is not the “recession or no recession” debate, but rather the fact that the American economy has never properly recovered from the 2008-2009 downturn. If investment and exports fade there will be nothing left to take their place.

· GREED & fear’s view remains that a third episode in unorthodox monetary policy is coming sooner or later. Macro investors who still buy GREED & fear’s deflationary view should increase bets on the 30-year Treasury bond relative to the 10-year prior to the Fed’s pending two-day meeting scheduled to commence on 20 September.

· America is likely to prove more a case of “Japan heavy” then “Japan lite”. This is because deflationary conditions are more socially combustible in the US than in Japan given its vastly different social fabric. Japan is also the precedent to show why zero rates and quantitative easing do not work since all the policy succeeds in doing is to cause banks’ net interest rate margins to decline thereby making banks ever more risk averse.

· The potential systemic risk remains Euroland. Negative cyclical momentum makes all the current efforts to deal with the sovereign debt crisis in the periphery ever less viable. A U-turn by the ECB is only a matter of time, in terms of renewed easing, and is why investors should remain short the euro.

· GREED & fear’s base case remains that, when the market pressure intensifies, Germany will continue to move in the direction of fiscal integration. The EFSF bill is still likely to pass the Bundestag on 29 September; though to appease concerns within her own CDU Party, Merkel will include in the bill a parliamentary veto for further expansion of the powers of the EFSF.

· Significant increases in the capitalisation of the EFSF, which will be necessary to deal with Spain or Italy, will seemingly inevitably trigger concerns about the sovereign credit rating of France. This is why eurobonds still look like the inevitable end game.

· The financial markets are pushing for action now on fiscal integration while the politicians, including Frau Merkel, still seem to think they have more time than they actually have. It points to a perfect recipe for a “euroquake”, the tremors from which markets are now signalling.

· GREED & fear would urge institutional equity investors not to ignore the merits of gold mining stocks which are still playing catch up with the physical gold bullion price. The one risk for gold right now is the growing potential for a sharp rally in the US dollar based on deleveraging risk aversion. Still GREED & fear would much rather own gold in such a repeat of the 2008 US dollar rally than the likes of the euro or the Australian dollar.

· The potentially huge downside for the Australian dollar is a key reason why GREED & fear continues to run a massive underweight in Australia in the Asia Pacific ex-Japan relative-return portfolio. Still the Aussie dollar will only really sell off sharply when the Australian central bank signals easing. This will happen sooner or later.

· The obvious point of vulnerability in the domestic Australian economy remains the housing market where the potential for selling comes from the one third of Australian housing owned by investors. As the core part of the massive underweight in Australia, GREED & fear also maintains the longstanding zero weighting in Australian financials.

· As for the rest of Asia, mounting euroquake risk clearly creates the potential for further correlated sell offs driven by the need to liquidate. The best way to hedge this risk is to remain short or underweight European financials which remain the source of the problem. Another approach is to short the euro against either the US dollar or a basket of Asian currencies.

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