Week in review 22 to 27 Nov 2010

Another week has gone, another week approaches.

This week on Also sprach Analyst:

Featured:Perhaps a recession is the only option for China – If China wants to learn something from the United States in managing the economy, it was the management of inflation. Unfortunately, if China does want to learn that, it will have to plunge the economy into a recession

What Google Trends Tells Us about Euro – Euro has not dropped as much in the current wave of Euro crisis as in the last one when Greece were bailed out. I resort of Google Trends to understand why.

Wars and Financial Markets – A little review of History: how did financial markets evolved around major conflicts?

Weekly Review

The week was full of drama. The biggest of all was the sudden bombing of South Korea by the erratic North Korea on Tuesday, which all of a sudden heightened the geopolitical risks around the region. Their are all sorts of speculations about what is really happening, but to me, no matter what, it only highlights the complexity of the diplomacy between the two Korean countries, as well as their major backers: China and the United States.

The sudden bombing weighed on the already weakening stock markets. The markets are weakening even Ireland has agreed to take a bailout, which the detail is yet to be finalised. The number is reported to be €85bn loan from IMF and EU for 9 years. People are quick to point out who will be the next to be bailed out, which will probably be Portugal and Spain. The “who’s next” question is a rather dangerous one, as the loss in confidence itself will bring the country on the brink of default. National debt has a Ponzi-like quality. As long as everyone is happy, the demand of debts will be around, and countries and stay afloat. If the opposite is true. I will not be surprised to see one otherwise healthy country (financially speaking) defaults. Of course, there are good reasons why Portugal and Spain.

In the United States, economic data might be mixed at best, with seemingly continued weaknesses in the real estate market while the job market is showing sign of stabilising. The Black Friday has just passed with some rather disappointing figures, with sales up only 0.3% according to ShopperTrak. I am not entirely sure why Black Friday marks the beginning of holiday shopping season, just as the report here suggests that the start of the shopping season might be earlier than traditionally thought, and some suggests that online shopping might actually show robust growth in holiday season. So we probably do not need to read too much on it.

As long-time readers know, I am rather bearish lately on China. My article on China inflation suggests that China inflationary pressure is very much due to inflexible exchange rate regime, which renders them unable to adjust monetary policy accordingly. As a result, the monetary expansion in China is so huge that it is just impossible to have low inflation. In order to stop inflation, China will need to make hard choices. But I have to note here that I was not mean to say that China is going to have a recession in the next 6 months: I simply don’t know. The Chinese government wants to balance all interests, which is an impossible task. They do not want to allow Chinese Yuan to appreciate too quickly, because they will bring an outright recession. Yes, I argued that a recession is now almost necessary to bring inflation and asset bubbles down, but no one in the Chinese leaders’ seats would like to initiate a recession themselves.

December is approaching, which means Christmas and the New Year is approaching. This is the usual lazy season for banks and brokerage houses. Though elements of surprises might be around even when people are taking time off. Euro Crisis, for instance, is like a time bomb which no one pay enough attention now, although we should. Euro crisis together with the random explosive device of North Korea and the bubble blower of China, risk appetite appeared to have declined, and we see the US dollar strengthening with the dollar index rising above 80 (!!), quite opposite to what quantitative easing was supposed to do. In short, I hope to be lazy, just as everyone on the Wall Street and what ever streets, but this is not the Christmas of 2009.

Economic Calendar (Abridged)

Source: DailyFX

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.