Sunday, December 4, 2011

China, Europe and the US

It's odd how most news articles nowadays revolve around these 3 regions. Here are two posts - the first by Michael Pettis where he is as bearish as ever. His primary point, which has been the same for a while now, is that the Chinese growth model is investment oriented and that for the past many years the marginal return on capital investment has been diminishing. In this post however he goes on to explicitly mention some of the things that have bothered me.


"But I think there are more formal reasons to believe that China is misallocating capital. Common sense suggests that when there is massive investment with
  • very little accountability,
  • severely distorted prices,
  • an incentive structure that concentrates the benefits of investment in specific jurisdictions and over a short time period while spreading the costs throughout the national banking system and over the debt repayment period (which can be decades),
  • no or very limited budget constraints,
  • factional and regional conflicts, and
  • shifts in responsibility as the instigators of the investment are promoted (often because of the positive impact of their own investment initiatives),
it would be a rare system in history that did not tend towards substantial capital misallocation."

The second post is the transcript of an interview with Stephen Roach. He simply says that big guns can only stall a meltdown/ crisis and can give a floor for panicky financial markets to start functioning. This is what happened in 2008 when the US intervened on an unprecedented scale. This time however, the Eurozone is ill-equipped because of the fundamental flaw in the structure of the single currency economic region. 

The problem with predictions is the timing of it all. 
"The world is going to be invaded by aliens. When? I don't know." 

Through all this it seems quite apparent that the global economy is going to slow down and the 'boom' that we have been witnessing for the past 2-3 decades may not be the way ahead. My question is, do underpriced stocks still make sense for the long haul?

No comments:

Post a Comment