Thinking in a sleepy town

Tacloban

10:41pm  Thursday  20 January 2011

I was reading the Asian economic outlook of one of the major international investment banks on the plane.  What I wanted to find out from between the lines is whether or not a crisis is brewing somewhere in the world.  For an event to reverse the trend that emerging Asian markets have seen last year, it has to be in the same magnitude as the Asian Flu of 1997 or the U.S. sub-prime mortgage and banking crisis of 2007 to 2008.  The Euro zone sovereign debt crisis will not be as damaging because the countries inside euroland can muster enough resources among themselves.  The only negative is that they will put a drag on global economic growth.

Here in Asia, sovereign debt as a percentage of GDP is relatively low and government deficits are of even smaller percentages.  The Philippines for instance has foreign debt of roughly a quarter of its GDP and a budget deficit of low single digit proportions.  All of the ASEAN 5 have similar debt proportions which is really an off-shoot of the Asian financial crisis of 1998.  China is trying to rein in growth, but it has such a robust economy that growth seems to perpetuate itself.

Anyway, potential problems like the major crises of the past two decades plus the dot-com bubble at the turn of the century are nowhere in sight yet.  Yes, there is inflationary pressure but not to the degree that it was in 1982 when interest rates had gone sky-high to the high teens and low twenties. (Yes, I was already trading then but in the FX markets.)  The real big question for us locally is whether or not we’re seeing a major economic bottleneck that will be difficult to overcome.

I keep on scanning the landscape because I do not want to be blindsided as most people were in 2007.  The sub-prime and banking crises had lurked its ugly head but many chose to ignore the early signs.  As a result, a major bloodbath followed.  I do not think the credit squeeze in China is going to bring about any crisis.  If at all, the credit squeeze should mitigate it.  The U.S. on the other hand is starting to pick up steam and the manufacturing sector has reversed decades of a down-trend.  To top it all, they are very far from heating up so no potential bottlenecks there.  Housing may take some time to recover in the U.S., but I think it is also because everybody has one or two houses already.  Why buy more?

Nevertheless, I think that this consolidation could last a few more days.  I will not ask anyone to be a hero.  I would actually encourage people to sell some positions on rallies and get some cash back.  We could be trapped in this range for a few more months.  It could be a wide trading range evolving.  It may be time for counter intuitive thinking.