Is the global financial crisis of 2008 truly over?

V. Anantha NageswaranJune 2011

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The US remains steeped in denial

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Negative interest rate gap – to persist

Source: Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accommodative monetary conditions, Bank of Japan Review, March 2011

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NYSE Members’ Debit balances in margin accounts

Source: Bloomberg Finance, LP

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What does ‘new normal’ mean?

Source: “Barbelling” a Bi-modal World - The Search for Excess Risk Premia and Tail–Risk InsuranceMay 2010, Deutsche Bank Global Markets (Brad Jones, Asia Investment Strategist)

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Now, you know why 1980-2005 was an aberration

Source: http://www.econbrowser.com/archives/2011/05/will_high_oil_p.html

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No further comments needed

Source: Greed & Fear, CLSA Research, April 28, 2011

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Long-term unemployed: rising trend with implications for skills deterioration

Source: “Many Moving Parts: A Look Inside the U.S. Labor Market” – the Annual Report of the Federal Reserve Bank of St. LouisPublished (April 2011) with reference traced from Felix Salmon Blog and www.businessinsider.com

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1982-2007 was an exception

Source: ‘From the golden to the grey age’, DB Special Report, Sept. 2010

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Medium to long-term return prospects from US equities is rather poor

Source: http://dshort.com/articles/three-valuation-indicators.html

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We are not too far away from ‘dangerous’ territory on valuation in S&P Composite

Source: http://dshort.com/articles/SP-Composite-pe-ratios.html

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The virus has spread – an assessment of International and Asia-Pacific conditions

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The global recovery of capitalists or capitalism?

Source: http://www.ippr.org/Blogs/NickPearce/WagesProfitsAndTheRecoveryCuiBono.aspx

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This is why the ‘future of financial markets’ is bleak

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Financial Sector Profits/GDP (LHS) Non-financial Sector Profits/GDP

Source: Bureau of Economic Analysis (USA) and Julius Baer

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History repeats itself? – Australian banks’ home loans lending standards

Source: ‘Banks need to update housing lending standards’, Australian Banks – Retail, BofA-Merrill Lynch, April 15, 2011

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Listen to RBA and not me

The exchange rate has risen further and, in real effective terms, is at its highest level in several decades.

Source: http://www.rba.gov.au/media-releases/2011/mr-11-07.html

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Where are we now, in Asia?

Source: ‘The Pressure Cooker in Asia – Bubbling Away’, The Asia Investor Letter, DB Global Markets Research, 3rd May 2011

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Why the previous slide got it right? – evidence from around Asia

Source: ‘The Pressure Cooker in Asia – Bubbling Away’, The Asia Investor Letter, DB Global Markets Research, 3rd May 2011

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Commodities – long-term buying opportunity

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Slowing growth rates in yields over time

Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa(Chapter 3)

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Bulk of the countries witnessing slower yield growth

Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa(Chapter 3)

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Excluding China and Brazil, land and labour productivity are falling worldwide

Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa(Chapter 3)

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Chart of crude oil prices since 1861

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The commodity speed limit for global growth is much lower

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-10

-5

0

5

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20

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0 1 2 3 4 5 6

Global GDP yy

CRB

yy

1975-79

2001-2008

1980-2001

2010

The trade off between global growth and commodity price inflation has tightened. In the 1980s and 1990s growth needed to be above 3.5% to cause sustained commodity price inflation. That has fallen to less than 2.5% now. With global growth projected at in excess of 4% for 2010 and 2011 the commodity speed limit is being broken.

Source: Barclays Capital Research

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Commodity sell-off is a BUY opportunity

Extraordinary weather patterns call for buying agricultural commodities on dips – driest April in 352 years in the UK; drought in China (shipping halted in Yangtze river and Hurricanes in the US outnumbering any seen in history)

Good election results in Canada call for overweighting Canadian assets. Dividend stocks and good bonds can be recommended

Long-short hedge fund managers now to be favoured as even Jeremy Grantham withdraws calls to be overweight equities in the Presidential year 3. The play is over.

US Retail sales – excl. gasoline and auto – much weaker

Continuing jobless claims rising

Risk of QE3 rising – buying commodities on dips makes sense

Re-emphasise the Asian Currency Basket

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Risk of a low income-trap in India

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The resilience of India

Source: http://dshort.com/articles/world-markets-update.html

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Nominal Indian GDP (2Q96=100) & India MSCI index (2Q96=100)

0

100

200

300

400

500

600

700

MSCI Nominal GDP

Index

Source: Datastream, Bloomberg

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Nominal Chinese GDP (4Q92=100) & China MSCI index with dividends (4Q92=100)

0

200

400

600

800

1000

1200

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1600

Q4

1992

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Q2

1994

Q1

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Q4

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1998

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Q2

2006

Q1

2007

Q4

2007

Q3

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Q2

2009

Q1

2010

Q4

2010

MSCI Nominal GDP

Source: Datastream, Bloomberg

Index

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Evidence of oligarchic capitalism

Source: ‘Tackling structural inequities’, Policy Paper 2, India 2039, ADB (2009)

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Neither desirable nor sustainable

Source: ‘Inequality, rents and the long-run transformation of India’ Michael WaltonDraft (April 2010)

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Final thoughts

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Investment implications

Build a portfolio that would stand volatility and insure (hope to) against downside risk in the next 24 months

Keep a small portfolio of high quality stocks

As for stock markets, Japan, Russia, Thailand make sense to us

Invest in no-default history Emerging Market bonds for coupons

Keep cash in three structurally sound sovereign bonds

Diversify into physical precious metals, agricultural commodities. Retain exposure to crude oil (Energy Fund or stocks)

Keep a sizeable portion in cash in a diversified portfolio of currencies

Take ‘known downside’ bets on over and undervalued currencies using cash portion as collateral

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Last word – check this out

Source: http://econstories.tv/2010/06/22/fear-the-boom-and-bust/

“To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm” (Hayek)

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Convexity is what we are likely to see in the next two years

“It's easy to forget that responses to actions aren't linearly proportional to the force applied, that many situations have a convexity in which just a little more can make all the difference, and a little less does nothing.”

Some potential convexity areas:

“That China won't run into social trouble in the long run either, even though so far everything proceeds linearly towards growth without political freedom.

As for the US, sooner or later there will arise a successful popular nonlinear response to the linearly increasing concentration of economic power that isn't devoted to popular improvement.”

Source: http://www.wilmott.com/blogs/eman/index.cfm/2011/4/24/Capitalist-Nonlinearities

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Quotes of the day

Insanity: doing the same thing over and over again and expecting different results

Only two things are infinite, the universe and human stupidity, and I'm not sure about the former.

- Albert Einstein

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Only Gold matters, going forward

Top panel shows Global Government Bond Index, JP Morgan EM Bond Index and MSCI World Free Equity Index. All of them are denominated in US dollars.The bottom panel shows the price of Gold in US dollars, Euro, AUD and GBP.Both the panels are indexed to a starting value of 100 as of October 4, 2002.Source: Julius Baer and Bloomberg Finance LP

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