Wednesday, October 28, 2009

Chris Wood Gets The Vapors

Chris Wood of CLSA writes in the WSJ:

The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money. For example, the near-term prospects for the housing market in the U.S. will be strongly influenced by whether the federal government extends its first-time home-buyer tax credit when it expires in November. Like cash for clunkers with autos, the risk is that such a program is simply buying demand from the future.

He's concerned that the increasingly hands-on intervention in industry by the US Governement will lead us into a liquidity trap a la Japan's Lost Decade. I'm not sure I totally agree with him; Japan's liquidity trap was due to a flight to quality - institutional investors ran to JGBs because Japanese corporations were way overleveraged. Today, it's the US Government that is stretched too thin. I wouldn't count out stagflation as a possible outcome rather than deflation.

Liquidity trap or not, I thought this was worth repeating:

This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

Go read the whole thing - it's worth it.

And, for those of you out there who didn't get the title of the post:
The Vapors - Turning Japanese (Sorry, no embedding.)

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