Each year during the summer season, Hollywood comes up with sequels, prequels and spin-offs of successful movies. 2011 is no exception. After The Fast and The Furious 5, Pirates of the Caribbean 4, Hangover 2, Kung Fu Panda 2, and the prequel X-Men: First Class, we will be treated over the next couple of months with Transformers 3, Mission Impossible 4, and the conclusion to Harry Potter, just to name a few of the biggest franchises.
Looking at the markets over the last couple of weeks, we get the impression that we are also reliving several stories already seen a year ago.
Double-Dip 2: After a rather dismal series of US data culminating in a less-than-impressive job-creation figure in May, last year’s question about the possibility of a renewed recession in the US has gained momentum again lately. However, many economists stick to the “soft patch” version of the story by attributing the current business cycle weakness in the US to special factors. High oil prices have taken their toll on private consumption and disruptions in supply chains after the earthquake in Japan have slowed down production – so goes the consensus narrative.
In our view, this sequel is only worth half a thumb-up. While we agree with the overall interpretation of the soft patch, which should ultimately lead to better growth in the second half of 2011, we find the Japanese earthquake explanation too far-fetched to be taken seriously. Regular readers of our research will notice that market participants have yet to adapt to the fact that the US growth seen in the last two decades will not be achieved in the next couple of years. Deleveraging is ongoing. The longer high unemployment rates last, the higher is the likelihood that they become structural and therefore also weigh on growth. And last but not least, the main driver of US growth from 2000 to 2007, the housing market, still has not bottomed out. Hence, a Double-Dip 3 is only a matter of time.
Chinese Real Estate Bubble 3: Over the last few weeks, many analysts have also started to refocus on the Chinese real estate market. It was already a hot topic in 2008 and back then it led the Chinese authorities and the People’s Bank of China to step on the brakes, resulting in a rather strong slowdown of Chinese growth at the beginning of 2009. The story resurfaced in the spring of 2010, but the six hikes in reserve requirements last year and the five since the beginning of 2011 should have made it clear that the Chinese officials are aware of the issue and are trying to deal with it. The latest data from China showed that in April, exports and investment activity remained strong but imports and industrial production were slowing down. Moreover, our view is that Chinese inflation is likely to peak in June and retreat from there. Hence, we don’t think that we will see a Chinese remake of the US housing bubble horror movie, though we remain on alert.
Euro Crisis XX: The term sequel is not really correct for the European sovereign debt tragedy. It rather resembles a TV series. Desperate Public Households would be my title of choice for it. The latest episode, staged in Greece again, has all the necessarily ingredients for a good thriller: another downgrade by a rating agency, tough negotiations regarding the next tranche of the rescue package – including a threat from the Greek finance minister that “the shutters of the country will come down” – as well as public demonstrations and strikes. The next episode of the drama is likely to occur again in Portugal, where the incumbent government was ousted in the recent elections. In my view, this series is poised to continue for another couple of months, bouncing in true Eurovision fashion from one country to the next. However, what makes it somewhat boring is the fact that the end is already known (despite all the denials of European officials): a restructuring of the Greek debt, and maybe of the other European peripheral countries as well. My favorite quote so far in this series comes from Jean-Claude Juncker, the Luxembourg Prime Minister and Head Eurozone Finance Minister: “When it becomes serious, you have to lie.” An instant classic!So forget Hollywood. Markets currently offer as good and as intense a drama. And come the end of the summer heading into the winter season, we might even be so blessed as to see the third sequel of Quantitative Easing.
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