By Yaser Anwar, CSC of Equity Investment Ideas
After bickering with Mrs. Investment Ideas as to "why" I’ve to blog when its a holiday (I told her I function according to Middle Eastern timings! lol– she didn’t find it amusing, oh well!) I finally did get to write my favorite post of the week.
US$ & Russell 2K- An Inverse Relationship
- While perusing a good research piece by Haver I learned of an interesting relationship between the US$ & Russell 2K. Depicted in the image below, over the past few years the US$ & Russell 2K indices have been inversely related.
- The surge in small/mid-cap stock prices since the broader equity market trough in the fall of 02 has occurred alongside a substantial downtrend in the dollar. However I was unable to find any long-term historical relationship which was consistent.
China & Its Water Shortage
- Over the past couple of years anything China related has been bid up by investors- From Commodities (Oil, Gold, Copper etc) to Industrials (CAT) to, for a lack of a better word, Food plays (MCD, YUM). Recently two of my good friends from school visited China and informed about how the water "absolutely sucked" especially in rural parts of China. Got me thinking.
- China’s sewage discharge has more than doubled from the early 80’s to an annual total of nearly 60 billion tons. As a result, half of China’s population consumes drinking water contaminated with human and animal waste. That’s why China has the worst stomach and liver cancer death rates in the world.
- According to the of Summit Global Management: "Because of low labor costs, China now produces 30% of the world’s total annual economic growth, and thus far the labor advantage has overwhelmed the limiting factor of water scarcity, but those two lines may soon begin to intersect. Water problems have now become the first priority of the government, because of rampant health and absentee problems in the work force, factory shut-downs from lack of water, and grain imports becoming necessary for the first time because of depleted ground water in agricultural areas."
- As you know China’s hosting the 08 Olympics in Beijing, that’s why it’s taking some serious steps to modernize its water systems. There’s a massive race to nearly double the amount of wastewater treatment infrastructure in the city.
- The overall picture, the WWF said, would only get worse in coming years as global warming brought lower rainfall and increased evaporation of water and changed the pattern of snow melting from mountain areas. (Source Reuters)
- So far I’ve been unable to find a China-specific water play but will keep you posted. For now all we have is the PWC water ETF.
- For more reading on the Global Water Problems, please visit this link (6 months old but still valid)
Iceland- Reminiscent of UK’s CB actions in 1992
- By now you would have heard the surprise rate hike in Iceland. This recent move makes me reminiscent of the UK environment that propelled George Soros into "RockSTAR status".
Why? Let’s go over the similarities-
- 1) The UK Central bankers kept on raising rates while the economic condition was dire to establish credibility. Icelandic securities were up about 60% last year thanks to the influx of money flowing in from HFs all round the world due to their higher short-term rates. This pushed the krona up to very high levels. One of the reasons Sedlabanki (an Iceland bank) raised rates is to establish credibility.
- 2) According to Iceland’s statistic office- Economic growth slowed to an annual 0.8% in the 3rd Q vs 2.6% of 2nd Q. So now all that money flew in last year will hit for exits as a slow economy = interest rate cuts (basic economics 101) and will lead to money flowing out. So the CB needs to avoid this move out- hence to establish credibility and keep the money in- they raise rates!
- 3) You don’t have to have a Ph.D in economics to know that the slowing economy cannot sustain such elevated levels of IRs- 14.25%. The UK CBankers learned that the hard way & its being repeated by Iceland now. In Feb Fitch Ratings its outlook on Iceland’s debt to negative thanks to current account deficit, external debt and overheating.
- So now we have assessed that the economy is slowing and past experience tells us that high IRs are not sustainable (basic physics: Law of Gravity- what goes up, must come down) during weakening economic outlook.
- By the way- the Krona dropped more than 30% earlier this year due to these imbalances. I would not be surprised if HFs and prop desks at Ibanks would be betting with forward interest swaps and exotic derivatives against Krona and Iceland.
Adding fuel to the fire was Fitch Senior Director Paul Rawkins, who told Bloomberg: "It wouldn’t be surprising if there were a few quarters of negative growth."
I rest my case.
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