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谢国忠

谢国忠博客:只说出心中真相

 
 
 

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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the party's over   

2008-06-16 20:09:58|  分类: 言论 |  标签: |举报 |字号 订阅

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The party's over / 謝國忠


Stagflation has arrived, and coping with it will be the most important factor for investors

Andy Xie


TheUS Federal Reserve is suddenly talking tough about inflation. Themarket has now pencilled in a rate rise before the year ends. TheEuropean Central Bank is signalling that it may raise interest ratessoon. The market fears an inflation crackdown by the central banks.Gold has declined, the US dollar has firmed and the yield curve hasflattened. The talk is really aimed at bringing down oil prices. Thesurging price threatens to checkmate the loose monetary policy by theFed and other central banks to support economic growth and failingfinancial institutions following the global credit-cum-property crisis.

But,the talk is likely to remain just that for a long time. While some raterises may be forthcoming, they won't be aggressive enough - raisingrates quickly, to above inflation rates. The bottom line is that theFed can't accept a deep recession to put the inflation genie back inthe bottle.

Excessive money supply in thepast fuelled the credit-cum-property bubble. The inflationary effect ofexcessive money supply was temporarily contained by China's laboursurplus and the collapsing demand for resources from Russia and easternEurope. After decades of massive export growth, China's labour marketis no longer a buyer's market. Russia and eastern Europe have begun toincrease their resource demands. The inflationary effects of the pastmonetary excesses are now catching up with us. The first consequence ofinflation's return is the bursting of the credit bubble.

Theknee-jerk reaction of the big central banks has been to flood thefinancial market with liquidity. This is adding fuel to the inflationfire. The current money stock is inflationary. Adding more money onlyaccelerates inflation. The excess money supply is piling up in marketswhere demand is strong but supply is tight - like oil. As thesecommodities inflate, wages follow. Through wage increases, all theexcess money supply eventually becomes inflation. This reality cannotbe changed by anyone's rhetoric. Inflation can only be stalled byaggressively cutting money supply, which means a deep recession thatcentral banks still cannot accept.

Stagflationhas arrived. Surging oil prices and unemployment symbolise its arrival.Coping with stagflation is the most important factor in investmentsuccess over the next two years. Even though property is a traditionalhedge against inflation, it won't work this time because prices haveinflated before and demand is worst affected by the credit crisis. HongKong is a typical place where property's inflation hedging nature ismisunderstood. As soon as you land in Hong Kong, someone whispers"negative real interest rates - buy property". But that totallydisregards the current overvaluation and the deteriorating incomechallenge.

Bonds are still priced as theywere during the low inflation era and may suffer a massive downwardrepricing of more than 30 per cent. Economic deceleration makes creditsand stocks vulnerable. Neither is cheap to begin with. Energy,industrial commodities and precious metals continue to benefit fromnegative real interest rates but may suffer a sharp reversal due tospeculative overshooting and central bank pressure. Cash is losingvalue as inflation is higher than interest rates. For investors, itlooks like a lose-lose world.

Today'sworld is especially treacherous for central banks with large foreignexchange reserves. China, Russia and Saudi Arabia have earned enormousamounts over the past five years and stashed the money mostly in the UStreasuries. They could suffer catastrophic losses if the treasuries arerepriced. The 10-year treasury is yielding 4 per cent, against 4.1 percent inflation in the US last year, and probably higher this year. Themarket still doesn't believe the current inflation rate will stick.When it wakes up to the inflation reality, the 10-year treasury mayyield over 6 per cent and its nominal value could decline by 40 percent. European and Japanese bonds may have less downside than the UStreasuries but they are also vulnerable to repricing. Selling bonds isprobably the most important decision in managing foreign exchangereserves today.

The only large enough andliquid enough alternative to bonds for foreign exchange reserves isstocks. But stocks, priced at 2.3 times book value, are not cheap. Asmarket expectations build of a global recession next year, stocks couldsuffer a 20 per cent decline and considerably more for some speculativeemerging markets. However, the decline is cyclical. When the globaleconomy picks up, possibly in the second half of 2010, stocks willrecover above the current price. But bonds won't. Hence, foreignexchange reserves should shift from bonds to stocks over the next 12months. As foreign exchange reserves are so vast, index funds areprobably the most practical instrument for the switch.

Commodities,while highly volatile, may perform well over the next 12 months, ascentral banks stall on raising interest rates. In the second half ofnext year, the hope that inflation will come down on its own mayvanish, and central banks could be forced to raise interest ratesaggressively to remove negative real interest rates. Commodities maytumble. While gold and oil are still hot, play with caution.

Cashis bad but perhaps not as bad as other asset classes. If negative realinterest rates are 2 per cent to 3 per cent, holding cash may lose you7 per cent to 10 per cent over a three-year period, probably less thanmost asset classes.

It seems unfair thatit's so hard not to lose money. Good old cash has also become a hotpotato. But this is the price to pay for non-stop parties over the past10 years. It's a lose-lose situation. But you can choose to lose theleast.

Andy Xie is an independent economist

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