Missing links - FT Alphaville
'I Love the Delusion of the Markets at this Point in the Cycle' - Financial Armageddon
Retiring Fed Official Considers More Bank Action - New York Times
A Tale of Two Europes - Slate
Watching the Japan follies - Curious Capitalist
Beware of Greeks Bearing Bonds - Vanity Fair
Ireland insists not on same road as Greece despite ballooning bank debt - EUobserver

What is the new normal?

- Quantifying normal "The ‘new normal’ has become an established economic concept, reflecting the widely-shared view that global growth and asset returns will be lower for an extended period of time relative to the history preceding the financial crisis. However, there have been few studies that have tried to quantify the ‘new normal’. This note fills that gap."
- New global trend growth is 3%, not 4% "Our model-based estimates suggest that global growth will average 3% over the next decade, about a percentage point slower than in the previous decade. This outcome is both supply- and demand-side driven. Weaker trend growth will be the by-product of slower world population growth and ageing workforces. But it is also the result of continued de-leveraging and weaker productivity growth in many developed economies. Tighter financial market regulation and the associated impact on the cost of capital may also restrain potential output growth."
- Market divergence "In some ways the ‘new normal’ won’t be so new—divergent trend growth between emerging and advanced economies will endure. Emerging Asia and the Middle East are likely to be the fastest growing regions of the world economy over the next ten years. India, China, and Vietnam enjoy the best longer-term growth prospects in Asia, while Qatar, Egypt and Saudi Arabia lead the pack in the Middle East. Still, Asia will slow somewhat in the next decade, whereas the Middle East has the potential to accelerate. Latin America may also do better in the coming decade."
- The risks "Of course, nothing is assured. Downside risks range from the possibility of more severe sovereign debt crises, heighted protectionism, more restrictive financial market regulation, or a hard landing in China. On the other hand, to the extent that advanced economies undertake structural adjustments to mitigate the impact of ageing populations or boost investment in productivity-enhancing endeavours, faster trend growth relative to our base case is possible."
- Implications "Overall, our estimates suggest that consensus forecasts for trend growth are too high. If investors have to adjust downward trend earnings estimates, valuation multiples are unlikely to expand, even from relatively compressed levels. Finally, on our numbers for trend growth in developed economies, long-bond yields of around 3% do not look particularly out of step."

UBS Tectonic Economics 20100903

China’s 12th Five-Year Plan: rewriting the social contract?

- "The Chinese government is scheduled to review and adopt the 12th Five-Year Plan (FYP) this October. We preview the key contents that will likely be included in the 12th FYP, and their impact on different sectors and stocks":
• "Structural adjustments taking centre stage: Three major topics will likely dominate the 12th FYP: 1) income distribution reforms, 2) urbanisation and provision of public services (public housing could be the key point), and 3) CO2 emission reduction and proposals for a greener economy."
• "Key themes for the next few years: 1) Consumption will take the lead to drive the economy; 2) industry relocation, urbanisation and the 'green drive' will keep investment growth reasonably strong; and 3) financial disintermediation."
• "15 stocks to play the structural trend: We believe the following stocks should provide relatively good returns with a three- to five-year view on the structural development of China: CCCC, China Life, China Merchants Bank, China Vanke, Citic Securities, CR Gas, Delta Electronics, Hengan, Sany Heavy, Sany International, Shangri-la, Synnex, Tencent, Weichai and Wilmar."

CreditSuisse China Market Strategy 20100901

Corporate Action/New Term, New Rules

- Pan-European — Corporate Action
Cracking quarter — "Almost 50% of European companies have beat our analysts’ expectations. This is the best quarter since we started tracking results in 2002."
De-equitisation — "Corporate bond and FCF yields have crossed. Debt cheaper than equity funding. This should provide fuel for M&A and share buybacks."
- UK — New Term, New Rules
Small/mid-cap view — "We feature an excerpt from our UK Small- and Mid-Cap team’s September Review highlighting their key themes."
Key themes — "UK economic uncertainty, defensive growth expected to outperform. Other 2H10 themes: M&A and EM earnings growth."


East wind, west wind

- Overview - East wind, west wind
- Germany: Growth sets in "In Q2 2010, Germany reported the strongest growth since reunification, up 2.2% after 0.5% in Q1, buoyed not only by foreign trade but by other factors as well. Household consumption picked up again thanks notably to the decline in the unemployment rate to 7.6% in August. Companies have increase investment spending due to brighter growth prospects and the upturn in production capacity utilisation rates."
- Emerging countries: sustained growth without overheating "In Q2 2010, real GDP growth in emerging countries remained sustained at still around 7% qoq annualised despite the slowdown of exports in may Asian countries, notably China. Inflation has flattened out since February-March in most of countries. In contrast with what occurred in 2007-2008, strains on oil prices and commodity food prices in the first half have had a muted impact on headline inflation. Financing conditions have become more favourable than before the financial crisis for the best rated borrowers. However, the risks of stock market and real estate bubbles are lower than it was at end- 2009."

BNPParibas Eco Week 20100903

August 2010: A volatile bottoming process ahead

Key market drivers: "MSCI China declined 2.6% over the past month, underperforming MSCI EM by 1.0%. We see mixed sector performance over the past month: healthcare was the best performer (+4.3% m/m), followed by utilities (+1.1% m/m) and consumer staples (+0.9% m/m). Financials turned out to be the worst performer, down 5.3% m/m."
Key economic events: "July macro indicators as well as August manufacturing PMI suggest that the notable economic slowdown in China since early 2Q could have stabilized somewhat recently at a lower level. IP rose 13.4%Y/Y in July, translating into a 0.5% m/m increase in June, following a 0.2% m/m decline in June. The NBS manufacturing PMIs gained 0.5pt to 51.7 in August from 51.2 in July, staying above the expansionary threshold of 50. Inflation-wise, July headline CPI rose at 3.3%Y/Y. On the policy front, we hold the view that the PBoC will raise the benchmark policy rate once, by 27bp in 4Q10. Our year-end Rmb/US$ target stands at 6.6."
Investment strategy review: "We expect China’s equity market to experience more volatility in the coming months due to downward earnings revision pressure as the economic slowdown ripples through the whole economy, but recommend buying on dips because: (1) China’s real GDP growth, on a sequential basis, may have bottomed out at 7.2% QoQ in 2Q10. Yet we believe China’s final demand growth will not bottom out until late FY10, because the modest sequential rebound in GDP in 3Q should be driven by a slowdown in de-stocking and the widening of the trade surplus on sharply falling imports, rather than by a decent recovery in final demand; (2) improving liquidity conditions – (a) China’s M2 growth (which tends to lead H-shares performance), on sequential terms, is expected to bottom out, with trend growth reaching a trough of 11.8% 3m/3m, saar in September before rising to 16.8% in December; (b) we estimate new loans made by Chinese banks in 2H10 will reach around Rmb3 trillion, up 37% YoY; (3) we believe the worst of the policy tightening environment may be behind us."

JPMorgan China Monthly Wrap 20100902

Asean Property Outlook

- Offices
• "Most markets nearing or past cyclical trough"
• "Strongest momentum in Singapore with demand rebound, rents recovering"
- Retail
• "Underlying fundamentals strong – retail activity/tourism"
• "Supply has risen, increasing competitive pressures for mall owners"
• "Rental outlook stable/modest growth, mall specific"
- Residential
• "Low interest rates underpinning demand rather than yield/rent outlook"
• "Singapore saw a strong rebound in asset values, rents have lagged"
• "Kuala Lumpur – steady price gains despite increased supply"

Nomura Asean Property Outlook Sep2010

Eurosclerosis, American-style

- "The cyclical outlook remains tenuous but tilted toward “plodding along” as opposed to “double-dip.” The financial environment is looking increasingly like Japan’s, while the economy’s structural path looks more like Europe’s."
- "We have long expected a second-half slowdown in 2010 GDP growth, but the recent evidence points to a slower trajectory than we previously forecast. Accordingly, we are trimming our 2010 second-half real GDP projections."
- "We now expect Q3 and Q4 real GDP growth at 2.0% and 2.2%, respectively (compared to our previous expectations for 2.5% and 3.2%, respectively). The unemployment rate is expected to finish 2010 at 9.6%, up from our prior end-ofyear projection of 9.2%. Our end-of-year 2011 forecast is 8.9%."
- "Additional quantitative easing is a 2010 agenda item for the Fed, given the likelihood that unemployment will remain unacceptably high for the foreseeable future, with inflation running below the Fed’s implicit “target” of nearer to 2%, and with inflation expectations on the decline – but almost assuredly not an agenda item for the next (September 21) FOMC meeting."
- "Real GDP growth at least in excess of 2.5% would be required to bring down unemployment on a sustainable basis, and even so, the unprecedented scale of long-term unemployment in America is looking increasingly like a structural rather than “merely” cyclical matter."

CreditSuisse US Economics Digest 20100903

Fat & Flat; fertile for themes

- Action beneath the index "So far this year, equities have been disappointing. There has been plenty of action, but very little to show for it. The market has been stuck in what we describe as a ‘Fat and Flat’ range with wide sentiment swings driven by concerns about structural issues and macro data on the one hand, and a strong profit recovery and healthy micro supports on the other. Our sense is that valuation and strong balance sheets will win over investors and push the market out of this trading range late in the year, but we acknowledge that it may take some time for investors to get sufficient evidence to allay their fears. We forecast 260 on Stoxx 600 over 3 months and 280 in 6 months. The more sustained moves have occurred beneath the surface as stock performance has been dominated by a search for growth and the avoidance of domestically vulnerable companies. We expect the current environment to remain fertile for themes."
- Market discounting further economic weakness "The market seems to be discounting a significant slowdown in activity and further weakness in leading indicators. Fears about deflation abound, but the risks and comparisons with Japan are probably overstated. Nonetheless, our thematic views are consistent with weak domestic activity as a result of deleveraging. In this sense there are some similarities with Japan where globally exposed stocks outperformed domestic stocks after the bubble burst and strong balance sheet companies and those with high dividend yields performed well."
- Remain focused on EM growth, High yield and ‘stable growers’ "We remain long of EM and BRICs exposed companies (GSSTBRIC) relative to domestic and US exposed companies (GSSTDOME and GSSTAMER). We continue to favour stable growing, strong return companies (GSSTGRTH) and those with high yield and strong balance sheets (GSSTHIDY). We expect corporate activity will also be a key theme."

GoldmanSachs Strategy Matters 20100902

SARB is ready for another cut

- Market movers ahead: Rate decision in South Africa and inflation across the CEE region "Despite the South African economy continuing to recover, there are some signs that the recovery is losing steam and global economic slowdown poses further downside risks to the South African economy. At the same time, inflation continues to ease and is now well within the South African central bank target of 3-6%. Furthermore, the strength of the rand continues to be a thorn in the side of South African officials, as it undermines recovery. All in all, we expect the South African central bank to cut the key policy rate by 50 basis points to 6% next week. In August, inflationary pressure is likely to ease in all Baltic economies. However, the highest decline on a monthly basis is expected in Latvia and Lithuania. Estonian price levels are expected to remain the highest among the Baltic countries. In August we expect to see a stronger impact of seasonal sales (vegetables, clothing, footwear are characterised by a relatively strong seasonality factor) and decline in global oil prices. Future developments in Baltic inflation will largely depend on external factors. There is a substantial risk that due to unfavourable weather conditions the rise food prices will accelerate. However, domestic demand remains weak in the region, which would prevent inflation from more significant upside. In Estonia we observe a slightly faster increase in prices – this may be due to the introduction of the euro. As already indicated many countries experience a short-term jump in inflation during the euro changeover."
- Fixed Income Outlook: Focus on inflation "However, overall we do not expect any major surprises from next week’s inflation data and as such we would not expect any major market reaction. Global and regional inflationary pressures appear to be easing and our Monetary Policy Tracker (MPT) – which among other things tracks inflationary trends – seems to indicate that there are downside risks to inflation in most EMEA countries covered by the MPT. This, in our view, continues to signal downside risk on yields at the short end of the curve in most EMEA countries – with Hungary the most notable exception."
- FX Outlook: The trend is not the friend of ZAR and TRY "The two lowest scoring currencies in our EMEA FX Scorecard this week are the South African rand and the Turkish lira. Among the key reasons for this is that both currencies appear rather overvalued on a fundamental basis – and have been for some time. Furthermore, both currencies are quite sensitive to the deterioration of the global economic and financial climate we have seen recently and the uptrend in EUR/USD is something that normally weighs on both currencies, as they typically do badly when the dollar is losing momentum."
- Scorecard based trade of the week: Buy ILS/ZAR "For the third week in a row the highest scoring currency in our EMEA FX Scorecard is the Israeli shekel, while the lowest scoring currency is the South African rand. Therefore we continue to recommend buying ILS/ZAR based on our EMEA FX Scorecard."

DenDanske EMEA Weekly 20100903

Japan: Token Actions from Policymakers

- The economy is holding up well — "Despite a recent economic slowdown in the major trading partners (i.e. the U.S. and China), economic activity in Japan maintains some resilience. Monthly tracking data indicates that GDP growth in the current quarter will probably be higher than annualized 2%. While consumer spending is apparently being pushed up by the unusually hot weather and a frontloading of auto purchases ahead of the expiration of the government’s subsidy, export and business investment remains on a moderate upward trend."
- The BoJ took a token action — "The BoJ introduced a six-month funding facility at a fixed-rate (0.1%) this week, in addition to the existing three-month facility (¥20tn currently). The fund supply ceiling for the new operation is set at ¥10tn (frequency: once or twice per month, amount of loans provided at each operation: approximately ¥800bn). However, an additional supply of ¥10tn will take 6 months or longer and as such this should be seen as a relatively modest action. The new facility will likely lower term interest rates moderately over time, but its impact of taming upward pressures on the yen will be limited, in our view."
- The government’s economic stimulus package appears half-done — "In tandem with the BoJ’s decision, the government announced an outline of the economic stimulus package. Although the package is dubbed as a foundation for a departure from deflation, we cannot help but think that the contents are rather half-done (or less than that). We believe that the effects are limited both in stimulating activities in the short term and in strengthening economic growth in the longer term."


India: A very early indicator of trends in other emerging countries

- "In India, inflation is now around 15% per year, while inflation remains very low in the great majority of emerging countries."
- "India's situation is due to excess demand (ex-ante) in the goods market, the shortfall in supply being due to bottlenecks occurring in the labour market."
- "India is characterised by the absence of migration from rural areas to the cities and by a high illiteracy rate, which limits the labour supply; in many emerging countries, on the contrary, there is an excess labour supply due to the existence of plentiful reserves of labour in rural areas: it is in this sense that India is a (very) early indicator of future trends in other emerging countries, which will occur when there are no longer any labour reserves."
- "Once inflation has appeared, it is self-sustaining: the central bank does not dare to increase interest rates sufficiently, because of the threat of massive capital inflows. As a result, real interest rates have become negative, thereby stimulating credit and demand."

Natixis Flash Economics 417 20100826

Across-the-board increase in the levels of equity. What effects can we expect?

- "The level of equity will increase in all sectors:
• for banks and insurance companies, because of the new regulations;
• for non-financial companies, because of the determination to no longer depend on external financing and the distortion of income sharing at the expense of wage earners."
- "These developments will probably lead to:
• an increase in equity issuance, while demand for equities is weak in the aftermath of the crisis, which will lead to downward pressure on stock market prices;
• a fall in return on equity and earnings per share, hence another cause for a fall in share prices."

Natixis Flash Economics 416 20100826

Stability at Low Altitude/Global Recovery Remains Intact, At Least for Now

- U.S. Review -Stability at Low Altitude
• "This week’s data suggest that the economic dive that goes by the alias “double dip” remains a low probability outcome. This view is reinforced by policy presentations suggesting that any future weakness would be met with further monetary easing."
• "The roots of the current negative sentiment are found in the disappointing economic and jobs outlook relative to historical patterns. Fiscal stimulus associated with the Kennedy and Reagan tax cuts appeared to be more powerful than today, but the credit context of those stimulus programs was quite different."
- Global Review - Global Recovery Remains Intact, At Least for Now
• "More countries released second-quarter GDP data this week, and the results were generally strong. The Australian economy grew nearly 5 percent at an annualized pace in the second quarter, and growth in final domestic demand in Canada was strong."
• "Indicators thus far in the third quarter show that the global expansion continues as most purchasing managers’ indices remain in expansion territory. That said, the recoveries in some major economies remain fragile, and we do not expect a truly self-sustaining global expansion to take hold for some time yet."

WellsFargo Weekly Economic Financial Commentary 20100903