Buy Into Upcoming Global Weakness - Just Not In U.S. and Japan

Confused by current market contradictory convulsions? After all, "crisis" does stem from the Greek "krisis" which mean " to decide." Here are some pointers based on The Economic Clock:

Costly Contradictions
Markets finally are accepting that Fed Funds have further to climb - but that acceptance is nascent. So you get these kinds of riddles presented by one economist - strangely in the highly respected Financial Times (I have italicized the key curiosity):

The jump in US ten year yields is largely due to increased optimism that the US economy will rebound...In contrast, inflation expectations have remained subdued...

Curious, markets Thursday finally came around to the view that America's excess demand for goods is fanning the inflation fire, thus prompting the Fed to raise the Fed Funds more! So how one can speak of subdued inflationary expectations is baffling. For a long time we have been warning clients of another source of inflation in America: cost-push inflation, courtesy of rising unit labor costs.

And in Bloomberg we read that:

Asian stocks retreated for a second day on concern that rising global rates will curb consumer spending and corporate profits.

Reverse the logic: it is because of an excess demand for goods that global rates must rise, not the other way round!

We are not seeking to display our cleverness, but just wish to point out that such statements indicate just how confused markets are. So let's put some intellectual rigour into where we are headed. Put differently: where are we in the cycle? Once you know that you can avoid such costly contradictions, profiting instead.

Our View
We believe that the global Economic Time is characterized by an

• excess supply of money, and thus by an
• excess demand for goods.

Markets finally have moved out of denial and accepted the view that we have held since the last Fed Funds up-cycle began in June 2004, namely that Fed Funds will top out nearer six percent. And that is because the Fed wants to preclude inflation from getting out of hand, especially ahead of an election. So our view is that current convulsions have less to do with realities - that have been there all along - that with the two day fact that markets have started moving out of denial about inflationary threats, especially in America: they have pared back their expectations of imminent rate cuts by the Fed. That is all that has happened.

How to Make Money Off This Idea
Buy into market weakness next week - but avoid America and Japan, where The Economic Time has been worsening for a long time.

Comments

[Frank Li]

Hard to see how other global markets aren't linked to America and Japan. My guess is that if the US market takes a hit, emerging markets (for example) will take an even bigger hit.