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Ready for the epitaph

Ready for the epitaph
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First Published: Mon, Oct 31 2011. 11 24 PM IST

Photo: Bloomberg
Photo: Bloomberg
Updated: Mon, Oct 31 2011. 11 24 PM IST
On the face of it, the week is full of economic data in the Asia-Pacific region. Korean trade data for October, and Indonesian and Thai trade data for September are being released. Korean data will offer early indications of a slowdown in global demand. Korean export growth has already slowed, in any case. Thai export figures for September would not be of much interest. Post-flood trade data will be more important, for there is bound to be a substantial impact of the floods on the Asian supply chain. The Thai floods are a setback for global manufacturing just struggling to recover from the effects of the Japanese quake-cum-tsunami.
Photo: Bloomberg
The US household savings rate has now gone down to 3.6%. Incomes are stagnating while inflation boosts personal spending. The consequence is that the savings rate, which had gone up to 8% in early 2008 and lingered around 7% in early 2009, is now down to 3.6%, not too far from the savings rate of 2% that prevailed in 2006-07. The Swiss economic indicator (KoF Index) had plunged, whereas the decline in home prices in Australia has accelerated. That is the key country to watch next week.
The Reserve Bank of Australia (RBA) is meeting on 1 November to take an interest rate decision. Financial markets anticipate a rate cut. We have been one of the early ones to flag rate cuts in Australia. However, recent data flow has been better than expected, although subdued inflation data has not hurt the chances of a rate cut. So, the decision has become tighter. We are not sure if the decline in home prices is the smoking gun that RBA is looking for. Regardless of the outcome on 1 November, rates are more likely to go down than up from here on.
Of course, investors do not let the small matter of economic and political fundamentals disturb their actions based on hope and low cost of funds. Whoever they are, they have been myopic or motivated by other considerations than investment returns. It appears that investors who have been rapaciously buying stocks and risky assets are not the traditional ones. Data on liquidity presented by Christopher Wood of CLSA in his weekly Greed & Fear tells its own tale. Trading volumes have plunged in Hong Kong, in Asian (ex-Japan) exchanges and in the US. Yet, the Hang Seng Index has risen the most in recent weeks. In the US, the Investment Company Institute’s weekly equity funds flow data shows that equity funds have continued to face outflows right up to 19 October, the latest week for which data is available.
Therefore, it reduces the possibilities to two. Those who have been doing the buying are day-traders and algorithmic, or high-frequency traders, who wish to make a quick entry and exit riding short-term trends, leaving latecomers to nurse losses. Alternatively, they are strategic investors—sovereign wealth funds and secret accounts—whose objective is not to use markets as price-discovery mechanisms, but to manipulate them to give a false sense of well-being to the public.
Not for them is the drudgery of reading the fine print on the European Financial Stability Facility (EFSF). Nonetheless, if one goes through the “frequently answered questions” (FAQs) about EFSF on the website, one can quickly deduce that the facility is nothing more than financial engineering or financial alchemy. The FAQs strenuously deny that EFSF is a collateralized debt obligation-type vehicle. However, the proposed mechanism for leveraging EFSF to a larger size through special purpose vehicles gives the game away.
The FAQ document also wants investors to believe that the credit enhancement EFSF proposes to offer to investors of new debt issued by European governments under pressure—an insurance feature that protects their investment from losses up to some portion—would have no bearing on the market value of the existing debt of these countries. In trying to assert this, the document ties itself into knots while conceding finally and implicitly that the market might simply mark down the value of the existing debt that carries no protective insurance. Therefore, it should come as no surprise that the auction of the 10-year Italian sovereign debt on Friday went badly. Italy’s cost of borrowing went up to 6.06% from 5.86% a month before. Serious investors know the end is nigh.
The last straw is the unholy scramble among European leaders to approach China to invest in the special purpose vehicles proposed to be set up for each highly indebted European country, paying very little heed to the long-term strategic consequences of dependence on China. As a perceptive observer put it recently, the civilizational goal of China is global power and Europe is playing right into its hands.
Is it worth saving the euro this way, or will it save the euro at all? Norman Davies answers these questions in his comment in the weekend Financial Times on how history would record the rise and fall of the Euroland. Worth a read for a preview of what 2012 holds in store.
V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Your comments are welcome at baretalk@livemint.com
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First Published: Mon, Oct 31 2011. 11 24 PM IST