This is a admittedly conservative website yet I read it to find
out what others are thinking. It seems that others are thinking that
growth is over too.
R. Kinslow
Knight
Research' Stunning Call: "The Game Is Over"
Submitted
by Tyler
Durden on 11/17/2010
15:52 -0500
From Knight Research.
Presented without commentary.
The Game Is Over
The simple story is this: We believe the structural and cyclical
terms of global trade have finally reached their tipping point. This
will catalyze a wholesale change in sentiment and a historic
repositioning of risk assets. The emerging market global growth story
is over.
* In
meetings with clients throughout October, we began emphasizing our
growing concerns about the nearly ubiquitous confidence the financial
markets-and for that matter, global leaders and their body
politic-have in China; and by extension, the rest of the emerging
market story, commodities, and the direction of foreign exchange
cross-rates.
*
Not surprisingly, our concerns were met with varying degrees
of resistance; but the overall consensus clearly favored a very
bullish, asymmetric outcome over both the near and intermediate terms.
When pressed as to our own sense of timing and specific catalysts
for broad-based trend reversal, candidly we were unclear. Our sense
then, was that the higher and faster the commodity markets pushed, the
sooner the reversal would occur. But we have now clarified our
view.
*
In just the past several weeks, we believe the data and
government actions out of China, the back-up in US interest rates, the
Fed's emphatic commitment to QE2, intensifying pressures across the
EU, broadly rising commodity prices, government efforts to control hot
money flows, have finally pushed the global terms of trade to their
tipping point.
* And now,
as is evident by the flight to safety, and growing evidence that China
will soon try and effect price controls in addition to raising
interest rates and significantly changing the rules for their vast
network of Local Government Funding Vehicles (LGFVs); the writing is
on the wall. The game is over.
*
The simple story is this: The structural and cyclical terms of
global trade have reached their tipping point which will effect a
wholesale change in sentiment and a historic repositioning of risk
assets.
* So what
do we consider the "terms of global trade"? Structurally, per our
top chart, they are the intersection of Government Policy (viz., rule
of law, market systems, trade law, etc.,) Resource and Industry (viz.,
natural resources, labor/demographic pools, industrial advantages,
import dependencies, etc.,) and Economic Security (viz., the
sovereign's competitive standing, the relative power/needs of the
citizenry, the mandate/control of the government, etc.) And
cyclically, (as represented by the light blue, bold arrows) the terms
of trade are defined by the intersection of foreign exchange rates,
commodity prices, and the cost and availability of trade finance.
* And in
our assessment given:
1.
The structural breakdown of the credit and labor markets in
the developed world and the anemic outlook for nominal GDP growth
2.
The immaturity of the developing world and their vulnerability
to credit shocks and uncontrollable inflation
3.
China's dependence upon non-economic, and unsustainable
credit expansion to maintain growth far beyond natural export and
domestic demand, and
4.
Asia's dependence upon imported energy and
agriculture
the game is
over. Presently, we believe that the broad-based resurgence of
investor confidence in the emerging market and secular bull market in
commodities will end badly; proving that the rally which commenced in
Q2 2009, was in fact an "echo bubble" facilitated by massive-and
unsustainable-stimuli from the Chinese Government
* And
although such cataclysmic shocks rarely result in rhythmic, straight
line fractures, the chain of price adjustments should be
relatively clear. Accordingly, we expect a shockingly powerful rally
in the dollar, broadbased weakness across the commodity sector, a
dramatic widening of emerging market credit spreads, and what could
prove to be a stampede of hot fund flows out of the emerging
markets.
* We
appreciate both the gravity and the brevity of this note; but then
again, the story is simple.
We believe that the
end of the Great Consumer Credit Cycle and the vast structural
differences in the terms of trade between the United States, the EU,
and China, have finally caught up with the secular bull thesis on
Emerging Market and Commodities. Quite ironically, the Fed's
aggressive policies will likely prove to be the catalyst which breaks
China's unbridled expansion of credit and non-economic growth,
ushering in a wholesale rebalancing of risk assets.