>GLOBAL OUTLOOK (CLSA)

SOLID GROUND

Supply, demand & government

In the pre-Lehman world, we assessed supply and demand to estimate a future price. In the post-Lehman world, having done the supply/demand analysis we have another layer of questions to answer. Does the government want that price? Can it alter that price? And what are the unintended consequences of attempting to achieve that price? We can lament the new rules of the game or profit from them. This research is aimed at those who prefer the latter.

Short western-government debt
■ Public debt-to-GDP ratios soar even with high real economic growth.
■ Governments’ long-term solution is high nominal-GDP growth - inflation.
■ Taxation, inflation and currency deflation are government policies now.

Long inflation plays
■ The Federal Reserve’s less-liquid balance sheet reduces its inflation-fighting ability.
■ Never expect a fiscal solution to inflation.
■ The Fed will target debt to GDP and accept more inflation.

Long emerging-market equities
■ Lower real rates react with strong banking systems to produce credit growth.
■ Eventually exchange rates will be permitted to appreciate and the Asian century will begin.
■ Less economic volatility means higher valuations and capital gains from equities.

Long the US dollar . . . for now!
■ The USA will reflate first and end quantitative easing first, which will be good for the US dollar.
■ In the short term, emerging-market support for the US dollar will increase to support growth.
■ The European Central Bank cannot live with a strong euro at this stage, which is also good for the US dollar.

Long gold
■ In the long run, negative real interest rates are good for gold.
■ In the early stages of inflation, equities will beat gold.
■ A bear market in central banks will bring a bull market in gold.

To see full report: GLOBAL OUTLOOK