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谢国忠

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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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谢国忠:夏天的下跌还没有结束  

2009-07-20 17:20:52|  分类: 言论 |  标签: |举报 |字号 订阅

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夏天的下跌还没有结束


2009-07-20 
  

The summer dip isn’t over

 

Andy Xie

 

July 17, 2009

 

 

Thereis a saying in the stock market: sell in May and go away. Fund managerstend to go on holidays during the summer. Before they go away, theytend to shift their portfolios into a conservative position. In thestatistics jargon it means decreasing the portfolio beta. When all thefund managers do this, it amounts to a significant reduction of riskappetite in the market and can push the market down. What is occurringnow seems to affirm this saying. Stock markets around the world (exceptChina’s A share market) have been trending down since mid-June. TheUS’s S&P 500 index bottomed in early March at 676, peaked at 946 inmid June, and declined to 901 by July 13. Similarly, Hang Seng Indexbottomed at 11,345 in early March, peaked at 18,888 on June first, anddeclined to 17,663 on July 13. Other stock markets have shown similartrends.

 

 

In the past few days stockmarkets have regained most of their losses due to better earnings fromsome financial institutions and better predictions of future sales bysome technology companies. The financial sector earnings, in my view,are a distribution story and don’t predict the earnings for othercompanies. The IT sector, as I wrote in my previous article, isexperiencing creative destruction. Its pie is shrinking. But there arewinners too. Hence, good predictions from some companies don’t suggestthat the whole industry has turned around. When the second quarterearnings from all companies are reported, markets will be concernedagain. The odds are that the declining trend will continue into August.

 

 

Atthe end of 2008 I predicted a big bear market bounce in spring, 2009.The bounce would fizzle out in the fourth quarter of 2009 as inflationconcerns trigger the expectation of interest rate increase. I modifiedthis view two months ago to add a correction in the middle of the bearmarket rally, i.e., the market would be M shaped in 2009. The reasonfor the change was that economic data couldn’t improve as fast as themarket was hoping. The disappointment would cause a mid-year dip. Themarket was excited by improving production data in the second quarter.I thought that it was mainly due to inventory cycle and final demanddata would disappoint. The economic data so far affirm my expectation.I think that final demand would only improve marginally in the thirdquarter due to the delayed effect of fiscal stimulus, which wouldimprove market sentiment again. The expectation for interest rateincrease will weigh on the market in the fourth quarter and bring anend to the bear market bounce.

 

 

All assetprices seem to be correlated to risk appetite. The most important isthe dollar’s inverse correlation with stock market performance. Thedollar index (‘DXY’) peaked in early March at 89 and has beenfluctuating around 80 since. Even though the dollar has been on adowntrend since 2002, declining about one third in value, it has stagednumerous bounces along the way. These bounces reflect risk appetite infinancial markets. The dollar remains a safe haven asset. When riskappetite drops, the dollar tends to rise. Rising risk aversion drivessuch dollar bounces.

 

 

Oil price also showshigh correlation with the dollar. It doubled to $70/bbl from the Marchlow but has tumbled to $60/bbl since the dollar began to bounce inearly June. I think that the relationship between oil price and dollaris mostly correlation and some causality. In theory, if the dollardecline by one third and everything else remains the same, it roughlyjustifies 50% increase in oil price. However, the correlation betweenoil price and the dollar is far more sensitive than that. For example,11% decline in the dollar index in the spring was accompanied about adoubling in oil price. Merely 3% bounce in the dollar since has beenaccompanied by 14% decline in the oil price. Liquidity, driven by riskappetite, drives both the dollar and oil price in the short term.

 

 

Riskappetite is determined by the push factor-interest rate and the pullfactor-economic growth. When growth is high and interest rate is high,risk appetite is moderate. When growth rate is low and interest rate ishigh, risk appetite is low. When growth is strong and interest rate islow, risk appetite is high. This scenario fits the situation between2003-07. When economic growth rate is low and interest rate is alsolow, as the world is in now, risk appetite fluctuates with economicdata and policy actions.

 

 

I think thatthe global economy bottomed in the second quarter and would start toshow some growth in the second half due to the delayed effect of fiscalstimulus. With a broken financial system, monetary stimulus doesn’twork well. The market thinks that the global economy bottomed in thesecond quarter also but expects more growth in the second half. I thinkthat the developed economies may show 1-1.5% growth in the second halfafter 6% decline in the previous four quarters. The market was hopingfor much more. The anemic data into the summer have brought somereality to the market. The expectation is adjusting accordingly.

 

 

However,when the economic data improve significantly, probably in September,financial markets may become enthusiastic about growth prospect again.At that time, inflation risk would still appear low. Markets couldconjure up the scenario of strong growth and low interest rate. Theenthusiasm could bring the second wave in this bear market rally. Stockmarkets and commodities could regain or surpass their spring highs.

 

 

Neitherassumption-low interest rate nor strong growth is realistic. Instead,the world is moving towards high interest rate and low growth rate,i.e., stagflation. Before the financial crisis, the global economyexperienced nearly 4% growth rate and half as much inflation. In thecoming five years, I believe the best scenario would be half the growthand twice the inflation. The lower growth rate is due to (1) lack ofrising leverage as a driver for demand and (2) lower productivitygrowth rate as the beneficial effects of globalization and IT have beenabsorbed. The higher inflation is due to the surge in monetary supplyin coping with the financial crisis. The excess supply of money willbecome inflation overtime.

 

 

Financialmarkets are discussing exit strategies for central banks-when and howto retrieve the excess money supplies before they become inflationary.Central banks are reluctant to discuss it because they fear that itwould lead to the expectation of rising interest rate, which woulddampen economic recovery. This willingness to err on the ‘loose’ sidecould boost long term inflation rate. Central banks still don’trecognize the nature of the current downturn. It is not just cyclical.Schumpeterian creative destruction is a big part of the currentdownturn. As outdated businesses shut, it takes time for the laid-offworkers to find alternative employment. This is why the global economicrecovery will be anemic and a ‘jobless’ one. When central banks seehigh unemployment rates, they see economic ‘slack’, i.e., stimuluscould lead to more growth without causing inflation. If central bankswant to fight Schumpeterian creative destruction with easy money, itcould lead to high inflation and even hyperinflation in some cases.

 

 

Inthe same context financial markets are speculating about a second roundof fiscal stimulus, especially by China and the US. The purpose of thespeculation is to alleviate the growth fear among investors, i.e., morestimuli could always be applied to cope with low growth and, hence, youcan invest without fear. A second round of stimulus is quite unlikely,in my view. The huge budget deficits in Japan, Europe, and the US couldmake more stimuli backfire. Bond markets may decide that governmentswould all go burst and refuse to buy more fiscal bonds. Politicalbacklash against high budget deficits is just beginning and makinganother round of fiscal stimulus difficult to win support.

 

 

Chinahas low budget deficit and could afford a second round of stimulus ifit wants. However, China’s budget deficit is not as simple as itappears. The massive increase in bank lending, for example, increasesbudget deficit indirectly as the loose lending could lead to banklosses that the government is ultimately liable. The increased debts atlocal government-owned companies should be part of the fiscal deficit.Still, it is fair to say that Chinese government’s overall financialsituation is good enough to support another round of stimulus. But, itstill wouldn’t bring back sustainable growth. The current lending boomhas led to increased economic activities relating to government orSoE-led investments. There are few signs that the growth is spreadingsufficiently to private investment and consumption to create aself-sustaining growth cycle. The current round of stimulus hasimproved economic growth but has also increased imbalance in theeconomy. A second round may add more to the negative side then thepositive.

 

 

Even though the second round ofstimulus is quite unlikely for the foreseeable future, financialmarkets will continue to speculate on its coming, especially wheneconomic data are weak. Investors need stories like this to work uptheir courage to take the speculative plunge. When enough investorsbelieve a story like this, it impacts markets and rewards its believersin the short term. This is why there is an infinite demand and supplyfor story making. When the second round stimulus becomes too old to bebelievable, there will be another story to catch investors’ imagination.

 

 

Imaginationis important when interest rate is low. Low interest rate by definitionsubsidizes borrowing. Ceteris paribus, low interest rate increasesdemand for speculation. Such speculation is rewarded if low interestrate simultaneously leads to economic recovery. In the past two decadesit was almost always the case. Consumers in the west would respond toit and borrow more to spend. Hence, low interest rate could quicklylead to a broad based recovery. It paid to speculate when interest ratewas low.

 

 

The difference now is that theconsumer leverage in the west is too high. Even at zero interest ratewestern consumers couldn’t borrow to spend. Hence, the transmissionmechanism between low interest rate and demand creation is broken. Onthe other hand the transmission mechanism between low interest rate andfinancial speculation is alive and never better. Here lies the dangerfor speculators: the broad economic recovery wouldn’t come this time.

 

 

Speculationon short-term market movement is mostly futile. Most market folklores,if not all, are coincidences. The statistical evidences are too few tomake the correlation meaningful. The ‘sell in May and go away’ folkloreisn’t more meaningful than others, even though the fund managers’vacation phenomenon in the summer makes it sound more plausible. Thereare just enough exceptions to make the relationship not reliable.

 

 

Herdpsychology and structural bias are the only significant factors formaking predictions. Stock market has a bullish bias. Most of itsparticipants invest with other people’s money (‘OPM’). As the bonus ina rising market far exceeds the punishment in a falling market, thestructural asymmetry gives the market the bullish bias. This factor isespecially important when interest rate is low. Savers are incentivizedto look for alternative investments to bank deposits when interest rateis low. Bullish fund managers are more likely to attract flow fromsavers. When market is rising, savers could be caught in the momentumand shift more to stock market from bank deposits. The combination ofthis herd behavior and fund managers’ structural bullish bias leads tomarket spiking up from time to time in a low interest rate environment.

 

 

Suchmarket spikes can reverse on their own. Any spike will attract profittakers. Companies want to take advantage of such opportunities to raisefunds. The outflow can bring down the market. The correction that weare seeing now falls into this category. As interest rate remains low,the correction will attract new inflow that leads to a new spike. Thisis why I expect a second leg to this bear market rally in the autumn.

 

 

Sofar improving economic data are mostly on the production side due toinventory cycle. Final demand data are yet to improve significantly.They could show improvement in the autumn, which lends more support tobullish sentiment. Hence, the second leg in this bear market rallycould be quite vigorous also.

 

 

The bearmarket rally ends when interest rate rises due to inflationexpectation. As I have argued many times in this page, the globaleconomy is more inflation prone in the future than in the past. Lowgrowth doesn’t mean no inflation. The excess money supply releasedduring the financial crisis will become inflation first through highcommodity prices. The pressure for cost-of-living adjustment in thelabor spreads the cost push to wage increase. This spiral turns all theexcess money supply into inflation. When this prospect becomesapparent, probably in early 2010, market expectation will shift to biginterest rate hikes. I think that the Fed will raise interest rate by300 bps over the next 18 months. Other central banks will also raiseinterest rates, probably less. High interest rate kills the power ofimagination in the stock market and brings the end to this bear marketrally.

  

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