Tuesday, November 11, 2008

China's Bailout Hype Fizzles

It seems everyone was excited about the news of China's bailout for their financial system, however, that excitement was short lived. Kathy Lien points out in her blog post below that investors had simply pinned too much hope on China. Kathy also makes recommendations on currency trades that should do well in the current recession.

US equities turned as traders realize that everyone is pinning too much hope on China. The reality is that China’s stimulus plan will not save the global financial and economic crisis. Instead, the only thing that is assured is that at one fifth of 2007 GDP, China will have less money to spend on financing the US’ current account deficit.

China: Not the Answer to Everyone’s Problems

Every country is doing their best at stimulating domestic growth and that is exactly what China is focused on right now. Their priorities are at home and not abroad and their plans to invest in low-rent housing, infrastructure, rebuilding programs and tax breaks on capital spending are aimed at helping their economy cool at a more manageable pace. However it is not a bailout for the financial market and will not be enough to stimulate global growth. Some foreign manufacturing and construction companies will benefit from China’s investment in infrastructure, but the bottom line is that like the rest of the plans announced by developed governments, it shifts and not creates wealth. We also don’t think that it is a coincidence that China made its announcement ahead of a busy data week that will surely confirm the continued weakness in the Chinese economy. With a need to focus domestically, Chinese demand for dollar denominated investments will decrease, especially after some particularly nasty losses incurred at the Sovereign Wealth Fund.

Will there be Fireworks at the November 15 Meeting?

World leaders will be headed to Washington for the Economic Summit on November 14 and 15. The hope is that we will see more detailed proposals on dealing with the economic crisis. Unfortunately as the date nears, investors are starting to realize that no substantial changes may come out of the meeting. With a little more than 2 months before the leadership changes in the US, the current administration may not want to commit to any major policy changes. But if they do, that is exactly what can turn the financial markets around (US President-elect Barack Obama has announced that he will not be attending the financial Summit). Although G20 finance ministers and central bankers pledged to jointly tackle the global financial crisis at this weekend’s G20 meeting, the disagreement between more or less state controls are becoming increasingly clear. It remains to be seen whether there will be fireworks at this weekend’s emergency summit.

Recession Trades Still On

As long as US economic data continues to head towards multi-decade lows and concerns about earnings plague the financial markets, recession trades are still on. My favorite are short USD/JPY and short EUR/JPY.

Earnings forecasts have been cut for the 3 Gs - Google, Goldman Sachs and General Motors. With some analysts issuing a price forecast of zero for GM, the US economy and the financial markets are in for more trouble. Coming back to haunt us is AIG - the US government has been forced to hike its bailout of the insurance giant from the $85 billion in September to $150 billion. I wonder who else will be asking the US government for more money.

This article has been reposted from Kathy Lien. The full post can also be viewed on KathyLien.com.

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