After a brutal week last week, the market is due some respite from the onslaught of selling today. Investors have lightened up on their Indonesian holdings to more comfortable levels, and are likely going to watch political developments for now.
I have to say Russell Napier's macro strategy and thematic pieces has been one of the most invaluable research I have come across. I would have been a better investor and far better broker if I had just really listened to him in a world overloaded with infomation. His reports see below, were very much forward looking and proved that his contrarian views to be shockingly accurate.
"Double Bubble" (the future bubble in emerging-market equities, but the bubble in US Treasuries), "Supply, demand & govt" (talls about how the West's illusion of ever-increasing wealth is over. Governments will act to ensure living standards decline slowly rather than suddenly; a mix of inflation, currency depreciation and higher taxes is likely) and "How the rally ends" (The stock-market rally has a very long way to go, with the catalyst to end this rally being a rise in inflation to near 4%. The 10-year US Treasury yield will exceed 5% before the rally is over) The most revelvant piece to visit in this present turmoil would be "How the rally ends," published back mid 2009. Russell argues that we are in another rally in the long bear market that began in 2000. The last rally lasted from 2002-2007 and this current one should also last for a few years. One can’t call the end by using valuations or magnitudes of returns. Instead we must wait for inflation to claw its way back to around 4% and that the 10-year US Treasury yield will have to exceed 5% before the rally is over. The report shows that inflation is a worry (Asia is now clearly going thru an asset reflation cycle), but it is far too early in the business/reflation/inflation cycle to worry. It is indeed likely that inflation and rising Treasury yields produce the next down leg in the bear market. Until that time, many other positives will develop for equity investors. We are in another rally in the long bear market that began in 2000 and should last to c. 2014
Interesting to note US long dated bond have declined sharply in yield from 4.87% to 4.39% in the last few weeks. This rally in bonds with expectation of more to come is bullish for equties and commodity market.
You guess one would now say, this time is different because of the soverign debt crisis we now have in Europe. The following three short paragraphs from Napier gets to the heart of Greece's problem. For sure the near term can be ugly, what he does not think the danger of default and/or contagion from Greece is as serious as it was with Lehman's. In short, inflationary policies (ala Supply, demand and govt) ultimately be the solution.
"Eventually the ECB will realise that this deflation, which is now just in the fringes, is economically, socially and politically dynamite. Politically and socially Greece and the Euro fringes will struggle to take it. The political capital invested in the Euro is so huge that everything will be done to hold it together. They will have to go for growth and inflation at the core or destroy the Euro as fiscal policy can not do the job and direct fiscal transfers from Germany to a growing list of troubled states are politically impossible. Such a conversion however is not imminent.
It may buoy market sentiment if the markets can see that the ECB is prepared to go for this solution. So in Europe I believe that there will be growing evidence of easier monetary policy by the ECB and this will offset the current turmoil. It will be good for capital inflows to the Euro and asset markets. The ECB taking Greek Government debt (junk) onto their balance sheet is the first step. The big problem is that the ECB will probably only be truly galvanised into such a volte face on monetary policy after a major political/social disruption. This could well mean a break down in law and order in Greece. Yesterday members of the military staged a silent parade to protest about the cut in their bonuses! Don't know how long Greece has left as a democracy but things have to get worse before they get better (ECB gets really going).
Meanwhile, I think this means weaker European growth and also a strong dollar. This is not a good combination for Asian equities in general. I think in this situation capital flows will be heavily concentrated on US assets for now as growth in the US accelerates and interest rates are set to remain low for a prolonged period."
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