No Moping in Macau

02/04/2010 11:32 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

It was probably just a coincidence: the day the global stock markets snapped out of their fortnight funk, Macau casinos reported record January revenues 63% above the rake-off a year ago.

And that was the last anyone heard about Chinese credit tightening. Beijing’s crackdown on profligate bank lending had sapped demand for commodities and equities of late. But rather than simply hoarding the money pulled out of Shanghai stocks, the Chinese proved only too happy to convert some of it into gaming tokens.

It’s not exactly news that the world is doing a lot better than it was a year ago—witness the recent selling spree in the face of generally upbeat statistics. Macau’s year-over-year comparisons are also warped by prior enforcement of restrictions limiting many Guangdong residents to just two visits a year. These days, Beijing countenances monthly trips to the gaming den. With the economy and domestic consumption booming at double-digit rates, it can afford to.

While Chinese throngs play in the subtropics, G7 finance ministers and central bank heads will huddle this weekend in an Arctic wasteland. The North American contingent will at least be basking in the news of better economic growth. But the Europeans and the Japanese had better bring their thermal underwear.

Japan’s representatives will come to the powwow at odds over the best way to fight deflation. Standard & Poor’s warned last week that it could downgrade the country’s credit rating if things don’t improve. That would leave Tokyo looking up at the Saudis and the Slovenians in creditworthiness, lumped with the Italians and the Slovaks.

The credit agencies’ views are of growing importance now that Japan’s aging population will be increasingly cashing out its bond investments. Japan is already borrowing more than it collects in revenue, and roughly half of its IOUs is bought up by the central bank. Foreign investors won’t be attracted to this set-up by the negligible rates on offer.

As for Europe, it remains snowed in, with manufacturing and investing sentiment surveys providing fresh signs that the recovery has lost much of its former momentum. On the plus side, Greece now has a plan for digging out of its fiscal hole. Europe has endorsed it as a down payment on the needed reforms, amid rumors of talks on a financial rescue package.

Canada's government has now upped its estimates for this year's growth, though Gordon Pape warns that Toronto stocks could remain rangebound pending greater certainty on profits and interest rates. It's worth noting that two of the central banks that have already raised rates, those of Australia and Norway, recently passed up an opportunity to hike them again. They're waiting for greater clarity as well.

Whichever way the market lurches in the near term, it's hard to argue with Ryan Irvine's pick of a nursing-home trust yielding nearly 9% ahead of the forecast spike in its target demographic. Readers who prefer to wager on youth should check out Paul Goodwin's write-up of a big Brazil bank poised to prosper in its young and booming home market.

What's not aging well is the notion that the economic recovery of the past year is a some sort of fakeout, liable to vanish as soon as interest rates rise. Rates are heading up where growth has been fast. This is hardly a doomsday scenario.

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