Asia Rising from Europe's Ashes
10/21/2010 3:07 pm EST
Gregory Weldon, publisher of Weldon’s Money Monitor, sees breakouts in Chinese satellites and more stagnation in the Old World.
MoneyShow.com: Your recent research is very bullish on Asia and Asian growth. What makes you so excited about that region?Weldon: You have continued strong demand for imports out of China. Hong Kong is the most recent example: record exports to China, in line with record exports globally. And you have a situation, too, where the macro situation in the US remains disconnected from monetary liquidity.
In the past, when you have this dichotomy and the money that the Federal Reserve may print is not really needed in the underlying economy, when credit’s not expanding, when they’re anticipating cutting capital spending because we don’t need more capacity—in those circumstances, when you get at least the expectation of additional monetization of debt by the Fed, that money tends to flow into markets.
Based on their experience from 2009, when the Fed announced the Treasury buy-back program, people are looking to emerging markets and things linked to commodities. If you look at some of these Asian markets, the equities have already long broken out and the currencies have either also broken out or are beginning to follow. So, it’s a pretty dynamic situation—let alone the secular argument as it relates to emerging Asia becoming more of a percentage of the global GDP.
Q: Does that mean that Europe’s and North America’s pain is Asia’s gain as the stimulus flows there?
A: Yes, to some degree. I think you could make that case.
Q: Does that make you worry about the sustainability of this move?
A: It does worry me, longer term. Because you really do need the US consumer, you need credit growth in the US. And really, the last thing you need is more credit here. But in reality, the Fed’s job has become one of pain avoidance, and the best way to facilitate that is what they’re going to do.
I don’t see any significant improvement in the underlying fundamentals, particularly in the US, but also to some extent globally in housing and credit. Recent European credit numbers suggested an up tick there, but is some credit-driven, monetarily supported push in GDP potentially enough to reconcile this deficit and debt-to-GDP dilemma that Europe still faces?
My answer would be a resounding “no,” and therefore the sustainability has to be called into question.
Q: Are you surprised that Europe has held up as well as it has?
A: I certainly am. The markets don’t want that to be a problem. Those [springtime] pledges of austerity and promises of monetary support seemed enough to placate people. Bottom line, it’s not a significant enough improvement or solution that’s been applied in Europe. It’s going to be a problem.
Q: So, you don’t buy the argument that with Spain’s borrowing costs down, it’s just down to Greece, Portugal, and Ireland, and that they’re just not big enough to destroy anything?
A: That may be true, but then I look at Italy and the whole argument goes out the window. Italy’s numbers have slacked—it’s nothing good. You have deflation in wages at a time when inflation is rising.
Q: Is it possible to buy into the technically strong Asian markets given a fundamentally bearish view in Europe and the US?
A: It’s very difficult, but the one thing I’ve learned over 25-plus years of doing this is that liquidity matters more than the macro realities. I’ve certainly lost enough money trying to be short stock indexes on a macro argument when the liquidity is clearly the other way—that’s a losing proposition every time. So, this is one of those cases where you simply have to take the Jimmy Buffet attitude and chill and go with the flow, until that runs out.
Q: Which Asian markets look especially promising at this point?
A: I like Hong Kong and Taiwan. Those two are more closely linked to China. The currencies look like they’re ready to make a move. Having lagged moves in Indonesia, the Philippines, and Malaysia, I look at those two as having upside catch-up potential. You look at an index like Indonesia’s, and technically, the risk/reward is not there.
Q: Shanghai has also lagged other major Asian markets this year. Is that going to change given all the momentum around it?
A: We know China has problems. When construction hits a new high at the same time the vacancy rate hits a record high, that’s a problem. You have a $20-billion trade surplus three months running, and that looks great, but then you see imports outpacing export growth.
Imports of commodities continue to hit new highs, and you have the potential also for food price inflation to be a bigger problem in China than other places. But China has the fiscal and monetary latitude where an unsustainable situation can be sustained for a [while,] and that could be longer than you might want to think. And if that’s the case, then that bodes well for the Asian “tigers” linked to China, particularly those that export the most there.
Q: Thank you.—Igor Greenwald