• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Conclusion: QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally].

I’ll show the above equation until I’m blue in the face. In an quick and easy-to-understand way, it shows why Chairman Bernanke’s Quantitative Guessing experiment will do nothing more than to wreak havoc on global economies and markets.

Inflation is quickly percolating throughout the global economy. With the exception of a conflicted and compromised U.S. CPI report and the U.S. Housing market (we expect a 15-20% decline in prices by year-end 2011), INflation, rather than deflation, is what the rest of the world sees on a marked-to-market, real-time basis.

In fact, only about a handful of Fed Presidents fail to see what the rest of the world sees: inflation. So, in the spirit of service and being good Samaritans, we’ve decided to help Chairman Bernanke out in his tireless search for inflation. Below, we highlighted a few of the more interesting data points and nuggets from the global economy from just this week alone:

Monday

  • After six rate hikes YTD, Indian inflation (WPI) came in a whopping 4bps slower in October at +8.58% YoY.

Tuesday

  • Euro area and EU inflation accelerated 10bps each, coming in at +1.9% YoY and +2.3% YoY, respectively.
  • Korea hiked interest rates for the second time this year, raising the 7-day Repo Rate 25bps to 2.5%.
  • Chinese vegetable prices were reported up +62.4% YoY. To put this in context, China has roughly 477 MILLION citizens that live on less that $2 per day a PPP, with food being their largest expense. That’s 53% larger than the world’s third most-populous nation (U.S.).
  • Chinese Central Bank Governor Zhou Xiachuan said, “China is under pressure from capital inflows” and hinted that price controls may be in China’s near future.

Wednesday

  • Chinese consumer confidence fell for the FIRST TIME IN SIX QUARTERS on increasing inflation expectations. The percentage of consumers expecting inflation to quicken grew 600bps from the prior survey to 76%. In rural areas, that delta was +1,100bps, coming in at 89%.

Thursday

  • Korea will reinstate a 14% tax on foreigners’ holdings of the nation’s bonds, as well as a 20% tax on capital gains in an effort to spur speculative inflows of capital into the nation’s economy.

Friday

  • In classic form, three minutes into Bernanke’s QG campaign speech in Frankfurt, China hiked its banks’ reserve requirements (+50bps) for the second time in as many weeks and the fifth time this year.
  • China’s State Administration of Grain said it will ensure adequate grain supplies to manage inflation and cited speculation and excessive liquidity, NOT supply and demand imbalances, for pushing up the prices of grain in the nation. “China’s grain demand and supply are basically balanced with relatively ample stockpiles, so fundamentals don’t support a rally in prices,” the administration’s Zeng Liying, Deputy Director of the State Administration of Grain, was quoted as saying. “The government has the ability to ensure supply.”
  • According the United Nations’ Food and Agriculture Organization’s World Food Price Index, global food prices have climbed to the highest level since July 2008, when countries from Egypt to Haiti experienced deadly riots due to rising food costs.
  • Hong Kong imposed a 15% tax on home sales and raised down payments 1,000bps to curb the ascent in home prices (up ~50% since January 2009). Hong Kong Monetary Authority Chief Executive Norman Chan said plainly, “The Fed’s Quantitative Easing may spur inflows of cash into Hong Kong”, which would effectively serve to make a bad situation worse. Earlier this month, Goldman Sachs Group Inc. raised its 12-month target for Hong Kong’s Hang Seng Index to 29,000, saying the city has the most to gain from extra liquidity released by quantitative easing programs and China’s growth. I guess the operative saying here would be, “Don’t fight the Hong Kong Monetary Authority”, no?
  • German PPI came in higher sequentially at +4.3% YoY.
  • Brazil’s IGP-M General Market Prices Index rose 1.2% MoM in the second November reading, following a 0.89% MoM gain in October. Consumer prices (+0.59%), producer prices (+1.55%), agricultural prices (+4.65%) and industrial prices (+0.49%) all accelerated sequentially on a MoM basis.
  • Argentine President Christina Fernandez’s 2011 budget has been stuck in Congress since November 10th, on political opposition that she and her cabinet are understating their 2011 inflation forecast. At 8.9% the forecast is well below the estimates of current Argentine consumer surveys and economist calculations of ~25-30% YoY price increases.. “This budget is a lie,” remarks Francisco de Narvaez, a lawmaker for the Federal Peronism opposition party. “Approving this bill is lying to the people, it’s telling them that there won’t be price increases.” Argentine economic statistics have been under heat since January 2007 when then-President Nestor Kirchner was rumored to have started tampering with the official inflation statistics. Reminds me of a certain government we’re all familiar with… 

At any rate, the likelihood that Bernanke sees this note is about as likely as him seeing inflation with $150 oil – very low. Given, we offer it to you as an opportunity to position your portfolio(s) ahead of what we’re deeming World War III, which is a global economic war of rhetoric and monetary policy action.

Like most World Wars, this won’t end well for the global economy in the near term. For more details, please check out this clip of Keith on Bloomberg t.v. today discussing in just a few short minutes what took me 900 words to say: www.youtube.com/user/bloomberg#p/u/5/kKFD1dEwkoI 

Have a great weekend,

Darius Dale

Analyst

We See Inflation - 1