Courtesy of Mish.
Steen Jakobsen, chief economist at Saxo Bank in Denmark, sent an interesting email yesterday regarding China, Germany, the European debt crisis, and equity prices.
Steen is one of the speakers at Wine Country Conference II, May 1-2 in Sonoma, California.
What follows is from Steen, I dispense with my usual blockquote style for ease in reading.
Economic Vacuum
China’s flag is waving strongly these days, the direction of the economic- and political winds have changed but the present multitude of macro changes is yet to be recognized by consensus and the market.
My conclusion is this:
- China will slow-down to 5% growth over next two-three years.
- China will start devaluing their currency in response to Abenomics and weaker terms of trade
- China will no longer be the world’s biggest investor and importer of investment goods.
The changes will during 2014 mean that:
- Germany growth will go negative quarter-over-quarter in Q4 (from Q3)
- World growth will come down from the recent 3.7% to less than 3.0%
- The recovery will once again be postponed and the synchronic monetary policy of the major central banks will be questioned, leading to all time new lows in interest rates
- Deflation will take hold in Europe and become a major risk in the US
- This final third crisis in this cycle will mean equity needs to be sold off. This comes after commodities sold off in the US banking- and housing crisis, followed by fixed income during the late stage European debt crisis now I see a 30% correction in H2 of 2014 after a high is registered between 1840/1890 in the SPX.
I simply believe that China leads the world. They took the burden of world growth in their hands during the peak of the crisis in 2008/09 through the biggest fiscal expansion ever seen (550 billion US Dollars), then they increased their investment to GDP ratios securing export orders for major European and US exporters until late 2013, but since the Third Plenary Session of the 18th CPC Central Committee in November 2013 the main objectives for the political elite in China have changed from growth and export to rebalancing, fighting graft, reducing pollution and betting a small crisis now is better than a big one later.
I have already spent considerable amount of ink explaining why China is proactively seeking a small crisis rather than a big one and how China can no longer afford to keep its investment to GDP levels excessive but now China seems to have engaged in a fundamental change to its FX rates – attempting to weaken the CNY [Yuan].
China is a long term critic of Abenomics and the ensuing devaluations as Japan and Korea remains its key competitors in the export market, but until last week China held their FX tight and tightening but now things have changed:
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