Thursday, August 30, 2012

Get On The Right Train

As we enter into the fall season, it’s a good time to stop and reflect on the summer. The summer has been a relatively quiet one where speculation was afoul without much concrete action. Speculations of further US Federal Reserve quantitative easing or another round of Chinese economic stimulus were abound in the rallying market.

In Asia, China reported July inflation of 1.8% year over year, a level which can better accommodate both expansionary monetary and fiscal policy. 2012 is a political transition year for the Chinese Communist Party, and the last thing the government wants is social unrest from a rapid slowdown. At current levels of inflation Beijing can act quickly to reverse some of the fiscal policies used to slow down the housing market and expand the monetary base through its control of the banking system. As an example and seen in the chart below, the stimulus package announced in the midst of the 2008 financial crisis came after a significant decline in China’s CPI.


Source: Bloomberg

The Chinese government will need to initiate stimulus to maintain social and economic stability in addition to meeting the 7.5% growth target announced by premier Wen Jia Bao earlier this year. Will it be as strong and outright of a package as last time? Definitely not, but it’s a pretty good bet they will do something that will move the markets. If I knew when I’d be a millionaire.

We enter the fall months alongside warnings by media pundits of a volatile market driven by disruptive quotes from the European leaders. It isn’t hard to see why this sentiment persists with such a range-bound market in the last year. As I see it, people are worn from a bear market and the easiest way is to go up. I’ve been seeing a lot more articles about how people are becoming disinterested in the markets – nothing gets their attention like a rally. 

Sentiment can shift at a moment’s notice and just hope that you are riding on the right train! Good luck.