Tuesday, July 19, 2011

Comments on Europen situation

As I'm getting more settle down with my new house, I hope to be active and certainly hope be able to think and reflect on investment issues. Moving to a new place is certainly not easy, just the notification of new address is enough to kill me. Then I need find a buyer for my old house but I think I should be thankful instead of complaining because there is a small price to pay for much better gains.

I finally decided to comment on the European situation even though this is a very old news and not many people commenting this. Every now and then, this headline seems to rattle the markets. Why is it so?

The key word like austerity scares a lot of people. Belt tightening means they are trying to rebalance their fiscal discipline. Does that means they are cutting public spending, restructuring bad debts, etc??? I don't have enough data at this point of time. All I read was people just making hypothesis of belt tightening = cutting spending = slower growth(could be negative too!). Shaking off excesses will sometime last at least 2 - 3 years. However, I opined that if they are serious about getting their house in order, post-restructuring will always bring about a much healthier and stronger economy.

The other implication is deleveraging. If banks holds a lot of European debts(bonds), currencies and etc...as the de-rating kicks in, that can cause sell-off somewhere to meet redemptions.

The other point is the European central banks face the problem of imported inflation such as excessive liquidity by the US easy money policies. This may cause them to raise interest rate. Traditionally, European central bankers are more hawkish to raise interest whenever they sense inflation threat. But with weak growth, do they really want to raise interest? Raising interest rate is not a good thing because that will discourage growth from private sector(nobody want to take risk). And that is a bad news for growth.

Forth point, I'm going back to decoupling theory. The last financial crisis taught us worldwide economy can be decoupled but financial markets cannot be decoupled. Some folks out there may believe decoupling theory for both economy and financial markets is a joke or a fairy tale. Hence these folks will believe that export dependent markets such as China and Asia will surely greet with slowdown. Even some believe economy can be decoupled, imported inflation will eat up all the quality of growth. Yeah, with China gun shy to stimulate their economy(due to strategic reason to engineer soft landing), where else can we look for economic growth?

Well, one possibility is QE 3. Well I don't think we can even consider this as an option to drive growth, even it does, it will be short-lived and inviting more QEs. Is the world digging into a deeper hole?

It is seems like not much good news to pick up from the economic fronts and only one hope left to catalyze the market...is...the hope of strong profit from listed companies. Any disappointment on the companies earnings will certainly pours fuel to the increasingly flaming fire.


dukuhead said...

i'm actually bracing for the coming second recession to end the fake recovery. any day now.

Jack Phang said...

I believe that what is happening in Europe will not give any major impact to Eastern countries especially China.