Wednesday, September 9, 2009



Sugar high

Last month’s rally was the most ‘unbelieved in’ I can remember in over 30 years. And yet a scuttlebutt of cash rich fund managers here suggests that many of them will continue nervously funnelling money into equities on a 12 month view. But where are the combined top and bottom
line corporate earnings growth coming from?

An alternative plotline
The world has far too many factories, office blocks, container ships, freight lorries, retail spaces and workers, especially workers, for the amount of ‘stuff’ that consumers in the US, Europe, Japan and China can or want to buy. American and European consumers are shell shocked and
retrenching, and Chinese consumers don’t spend anything like enough to lead the world to recovery.

Maybe a better bet to help at the margin is Mrs Watanabe in Japan — currently sitting with her purse shut tight on up to $14 trillion of savings — if the mood music changes with a
new party in government or the first time, virtually, in over 50 years, promising to deflect public money to fructify in consumers’ pockets, notably via cash subsidies to families with young children. There’s always the high risk of course that Mrs Watanabe will simply save more, and that the political change will be more like ‘a small earthquake than a tsunami.’ But, see the last MoM …

As for China, it still needs Western consumers to go on ‘sugar highs’. Its own household consumers still only account for some 30% of the GDP — putting their spending at about a tenth of the stricken US household sector. The country’s current ‘statistical recovery’ has been based on pouring cement, expanding already serious overcapacity - now being addressed in the steel and cement sectors — and swelling, already bloated NPLs. Most of China’s growth between 1990 and 2007 was down to the impact of the ‘wealth effect’ enabled by debt securitisation in the West, and credit-based consumption. That’s all in sharp reverse. Even when household and bank de-leveraging is mostly done, a strong new cycle of credit-based consumption is unlikely to kick in for at least five years. China’s formidable drive to wean itself of dependence on Western markets, reskew its domestic economy, and create an Asian ‘coprosperity sphere’ for the bulk of its external trade will take some years yet to achieve.

And India’s household spending, despite its growth trajectory and that it accounts for over 60% of Indian GDP – which, however, is only a third of China’s – is likewise far too small a buyer of foreign wares to help the global economy.

To see full report: MIND OVER MANIA