Sunday, July 14, 2013

Gabriel Gan: Was 19 June The Day That Killed The Golden Goose Or Did It Wake Investors Up?

12 JULY 2013
Was 19 June The Day That Killed The Golden Goose Or Did It Wake Investors Up?
By Gabriel Gan

The day US Federal Reserve Chairman Ben Bernanke warned that the stimulus package may come to an end soon, stock markets and commodities fell while the yield on US Treasuries surged after investors dumped almost all financial instruments in their portfolio.

The Bull Run in the US market has been ongoing since 2009 when the Dow Jones Industrial Average (DJIA) reached a low of 6,469 points and never looked back. While there were blips along the way, especially when the European debt crisis struck, the trend was up, up and up till 22 May when the index traded at an intra-day high of 15,542 points and there were whispers among Fed officials that an exit strategy was in place for QE III to end.

Worries were not unfounded when, at the post-FOMC meeting media conference, Ben Bernanke dropped the bombshell by stating that the US$85 billion worth of bond-buying programme could be trimmed by this year and may end next year if the unemployment rate falls to 7 percent.

For the week after Bernanke’s remarks, the US stock market fell but soon recovered after reaching a low of 14,551 on 24 June. As of 11 July, the DJIA had more than reclaimed the losses – and even chalked up gains – after a slew of better-than-expected economic data as well as comments on 10 July made by the Fed chief himself on the fact that the US economy continues to require assistance from stimulus measures.

Did the Fed chief make a mistake in the first place about announcing plans to exit from QE III? Why is he now making “amends” for his untimely comments?

The Watershed

On hindsight, Bernanke probably thought that it was appropriate for him to make plans for an exit – from QE III and for himself – before he leaves his post in January next year. He probably deemed it necessary to prepare the financial markets for the inevitable end of QE III.

He must have realised that the US economy – already proven by a slew of better-than-expected economic data – may well be able to stand on its own without the crutches of QE III, hence, he took a gamble to “stun” the markets by dropping the bombshell. From the recent labour market data, it has been evident that the private sector started to hire while the entire economy is also hiring. By pointing to the 7 percent-level as a benchmark for ending the stimulus measures, Bernanke probably knew it would be quite a while before jobless rate can drop to 7 percent as the long-term unemployed are now coming back into the market looking for jobs, hence, the persistently high jobless rate of 7.5 percent despite an increased number of job vacancies added.

It is an open secret that Bernanke will be leaving his post come January next year thus he probably sees it as his duty to prepare investors for the end of QE III and not to allow for the uncertainty to drag on till his tenure ends. Should he not do anything, it will leave investors speculating on whether or not the stimulus measures will end and, worst still, who the next Fed chief will be and what are his/her views on the economy and the stimulus measures.

It is indeed a piece of masterpiece by the man who has almost singlehandedly dragged the US economy out of the crisis. More importantly, he has made 19 June a watershed day whereby investors are forced to rethink their strategies as well as to shake off their reliance on government interventions in the financial markets.

The China Conundrum

It seems that investors in the US are more adaptable than their counterparts in China. While it may not be fair to make such a statement because the tightening has yet to start in the US, China has been facing such problems ever since inflation and prices of assets surged.

The current cash crunch adds to the problem of an economy struggling to regain its “glorious past” and there have been no signs that the central government has any intention to loosen monetary policy although pressure is mounting on the authorities to do something real quick.

Without the Rmb4 trillion launched during the US financial crisis, the Shanghai stock market has been struggling to get on its feet while the US stock market went on a Bull Run that is still ongoing. China’s stock market, on the other hand, has been trending downwards ever since 2009.

This clearly shows the extent to which investors are still suffering from the post-stimulus syndrome. Even at a growth rate of 7.5 percent, the Shanghai Composite Index (SSE) still does not look like it is moving into a bullish mode anytime soon.

To cite more examples that investors are still desperate for stimulus measures and are unlikely to kick this addiction, the DJIA rallied strongly on 10 and 11 July when Fed officials started talking about the need to maintain stimulus measures. Ben Bernanke confirmed his colleagues’ views when he said that the US economy still needs to be kept alive by stimulus measures in the foreseeable future. However, what is the foreseeable future? Will he change his stance once the US economy shows more signs of a stronger recovery? This is something that we need to be mindful of.

Similarly on 11 July, Premier Li Keqiang sparked off a strong rally in the SSE when he said that China still needs to maintain a certain amount of growth where there is a floor that will be deemed unacceptable once growth rate falls below this level. In addition, he also mentioned that there is also a ceiling for inflation rate. Investors took his latest comments as likely policy moves that will be fine-tuned very soon. From a cut in banks’ reserve ratio requirement to injecting more money into the economy, Chinese investors surely have very high hopes that something will be done sooner rather than later. On 11 July, the SSE surged 64.86 points or 3.23 percent while the Hang Seng Index jumped 532 points or 2.55 percent.

Beware Of Complacency

The rally on 11 July may set the stage for a horror show in China, which will be announcing its second quarter gross domestic product on 15 July.

After the recent scandal of fake trade invoices via the Hong Kong route and revised import and export figures following previously unrealistic figures, investors must be wary of the shock that is in the bag. Previously overstated figures may now come back to haunt investors as the soon-to-be-released numbers – if truthful – may not be a pleasant one.

More importantly, whatever Premier Li and Chairman Ben Bernanke have said does not alter the fact that QE III will end sooner or later. China, which has learnt its lesson after the 2009 stimulus package, will not want to repeat the same mistake.

It will be good if the markets can get used to life without stimulus measures but evidences have shown that we are still a long way to go before this addiction can be kicked. From now till the end of the year, focus will be on how much less of a bond buyback will the US Fed reduce by. Investors will be watching who becomes the next Fed chief.

For now, ride the rally but be very careful not to be too complacent.

Publish date: 12/07/13

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Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
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乔治·索罗斯(George Soros)



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