The Karachi Crunch

After closing down another -2.1% overnight at 9,963, Pakistan's Karachi 100 Index has lost -34% of its value since May. Inflation was reported this morning at fresh 30 year highs of +24.3% year over year growth! This is not good.

What people are missing in Asia right now is that the economic backdrop is very similar to that which Nixon had to deal with here in the US in the 1970's - wage and price spirals in tandem.

On its own, stagflation is plain bad. Combined with the kind of geopolitical risk that Pakistan carries, any investment in this country is plain scary.

  • The Karachi 100 Index Looks horrible
(Chart courtesy of

Setting The Stagflation Sun: Japan Is In Trouble

If there is one chart showing the most pronounced country level stagflation of relevance, it's this one. Japan reported a nosebleed level of producer price inflation this morning - a 27 year high in fact.

At +7.1% year over year reported for the month of July, you can see where this registers on the chart below, particularly relative to Japan's newly realized negative industrial production growth rate.

I realize that Japan is "cheap", but countries with these dire fundamental underpinnings can get a lot cheaper as internally generated levels of cash flow erode.

*Full disclosure: I remain short Japan via the EWJ (etf) in my fund.
Chart by Andrew Barber, Director

The Euro's Decline Is Re-flating UK Inflation

This morning the UK printed a big inflation report with a +4.4% increase in CPI for July. The Euro has dropped almost -7% in less than a month, and its weakness begets strength in imported inflation. Considering that commodities deflated in July, this number came in higher than I expected.

The Bank Of England's "targeted rate" of inflation is 3% - so this is not good. As you'll see from the chart below, this picture definitely does not let the British out of the box. As they dip into a recession, they will not be able to cut interest rates, unless inflation dampens from these highs.

Chart by Andrew Barber, Director

China's CPI Chart: Deflating From It's Highs

The most positive global macro data point from this morning's release schedule was China's CPI coming in lighter than expected at +6.3% for July (year over year).

Looking at the chart below, this is a downtick from the highs China reported earlier in the year, and down again from June's level of +7.1% y/y.

China's wage inflation continues however. We will have our eyes on the incoming data as it is released.
Chart By Andrew Barber, Director

Time Stamps

Putin had Medvedev call off the war planes in Georgia this morning, Oil is down to $113, and Gold is hitting its 2008 lows. Doesn’t the world feel like a warm and fuzzy place again?

The only place I’d feel safe is hiding underwater with a bag of waterproof cash and Michael Phelps waiving off bull sharks overhead. While it is not clear whether or not Russia’s first military offensive since 1991 is actually over yet, it is crystal clear that Russia will do what they want, when they want. On this day in 1953, Russia detonated “Joe4” – their 1st thermonuclear bomb. While we don’t see that happening again anytime soon, no one else who bought the US market at yesterday’s highs does either – that’s why we call these scary ideas tail risks.

Phelps won his 3rd gold medal for the US last night, and this morning the US market is going to make its bid for its 3rd up day in a row. Yesterday, after lunch, my quant model registered a sell signal at the 1312 line in the S&P 500, so I sold my SPY position there. We have a “Hedgeye Portfolio” tab up on our site in beta test right now. The objective of the product will be twofold: Accountability and Timing. Two things that I think buy siders and individual investors alike want from Wall Street.

While being long the US market for a “Trade” for the first time in 2008 was a short stint, remaining short the Japanese “Trend” continues to be one that I have time stamped on the books. Despite the blow off in commodity inflation in July, Japan still posted an inflation number for July last night that registered as a 27 year high (+7.1% year over year). Inflation can be imported by a weakening currency as well as heightening local wage inflation – Asian economies are struggling with both of these factors all of a sudden. These factors will perpetuate economic stagflation in the immediate term.

The Nikkei closed down another -1% overnight at 13,303. On a breakdown and close through the 13,144 line, watch out below. Japanese stocks hardly look as ugly as those in China or Pakistan yet, and if you believe in mean reversion, that’s the point. There is much more downside in country indices that I am currently negative on like Japan and Mexico, than their respective regional counterparts like China and Brazil. China closed down another -0.52% overnight, taking its losses to -10% in the last 3 trading days, while Brazil got clocked for another -3.3% down move yesterday, taking the Bovespa’s cumulative losses since our “Fading Fast Money” call on 5/20 to -26%. Fertilizer or live chickens anyone?

Pakistan’s Karachi 100 Index has lost -34% of its value since the beginning of May. Alongside the geo-political tensions they are dealing with, wage inflation and currency devaluation are being revealed as primal fears. This morning Pakistan reported an inflation rate of +24.3% year over year. No, commodities deflation didn’t douse their domestic fires. It is “global this time” folks, indeed.

In the UK, consumer prices inflation surprised me to the upside, coming in at +4.4% year over year. Again, this is a July report and comes in well ahead of expectations, despite commodity deflation. The Euro’s -7% decline in less than a month is inflationary (for them). It is also recessionary. The only positive global inflation reading we have this morning was China’s, of all places – but their stock market didn’t care. Maybe that’s because they make some of their numbers up.

We can be bullish on the US market “Trade”. We can be bearish on the Japanese “Trend”. We can have positions in neither. We are data dependent, and looking forward to reflecting these views to our clients, real time, with time stamps. The US Dollar is finally overbought, as are US stocks at S&P . If these highly correlated macro “Trades” reverse, expect the bearish “Trend” to retake its grip on US investor psyche, expeditiously.

I am hiding under water, and I don’t feel warm and fuzzy about anything fundamental going on above (other than Michael Phelps), yet.



At least one major supplier to the Echelon project may have been shown the green light to ramp up production again. The go ahead was apparently given 1 week after stoppage was ordered. It is unclear from the supplier whether BYD is resuming the project or has decided on a more definitive time table for resumption of construction.

Management indicated that they are sticking to their conference call commentary and that my information is inaccurate. Their best guess is that construction will resume in 3 or 4 quarters but nothing is certain.

The Echelon project could go in many directions. A change in scope (downsized if anything), an agreement with a new JV partner, or just more conviction on a financing time table could all be drivers of an earlier restart.

Echelon is a major part of the Bull and Bear thesis on BYD so we’ll keep digging.

Research Edge will keep digging. BYD may or may not

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