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Enzo's Take On The Mess


Readers of this blog would have noticed that I haven't been writing much original thoughts of late - its tiring repeating the dire and tyrannical. Might as well let others whom I respect (definitely not Kudlow and Cramer, they are both better off as cartoon characters, wait a minute... they are! ..) to share their thoughts. Enzo von Pfeil has been an investment economist all of his professional life. Having studied under Nobel Laureate Friedrich von Hayek in Freiburg, Germany, he got his PhD in economics and then joined some of the major banks in their day: Morgan Guaranty, Schroders and Warburgs. He was Chief Regional Economist for major stock brokerages in Hong Kong since 1990. Excerpts from Dr. Enzio von Pfeil's December 11, 2008 appearance on CNBC Worldwide Exchange:

  1. Governments are stepping up measures to ward off the worst financial crisis. How effective are these measures?
    • From a structural perspective, they can be only of limited use. As Robert Samuelson posited in the South China Morning Post, “Private behaviour is neutralizing public policy.” Indeed, The Economist’s illustrious editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to Central Banks was not finding its way into the private sector.
    • Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that Central Banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend - only, once they re-gain confidence can an excess supply of money be created.
    • So, current measures, are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for response is limited.
  2. How deep are you expecting the recession to be, and what will be the impact on financial markets?
    • How long is a piece of string?
    • My guess is that the world is going to “L” and will remain there until at least the end of 2009.
    • Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof).
    • Leery lenders won’t budge for a long time.
  3. When do you see the markets bottoming out, how much more downside is there?
    • Expect to see another 30 – 50% down, once earnings start hitting and analysts have to revise down their rocketing price earnings ratios.
  4. What are you expecting from the FOMC meeting next week? A zero rate policy? Reality?
    • More quantitative easing from Bernanke-san.
    • As Robert Samuelson points out in said editorial today, “…the Fed’s new loans and credits easily exceed $1 trillion.”
  5. What is your investment strategy, and some trends and themes for 2009?
    • Please see below.
    • The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.
  6. Are there any other topics you'd like to discuss?
    • The current bailout packages are creating scary consequences down the road.
      • On the fiscal side, the US federal budget deficit will balloon.
      • On the monetary side, as Samuelson points out in today’s editorial, the Fed has moved way beyond being a lender of last resort. Indeed, now it is a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!
    Excerpts from Dr. Enzio von Pfeil's November 18, 2008, appearance on CNBC Asia, Worldwide Exchange:
  7. Asian economies are in technical recession - how does that impact your investment strategy and asset allocation?
    • Investors have discounted this mess for the past six months.
    • Thus, I have no major changes to my investment strategy/asset allocation.
  8. What are some investment themes up to the first half of 2009?
    • The next bubbles that have to burst are:
      • Long-dated bonds, on account of the rising US and other budget deficits, and
      • The dollar itself.
  9. Which markets and sectors do you especially like?
    • No markets, as the global Economic Time™ is virtually the same everywhere: the chickens of irresponsibility are coming home to roost.
    • If one must be in markets, then invest in “vital” sectors like consumer staples, food, healthcare. At least, they won’t get hurt as much because people still have to have these products and services.
  10. Current earnings so far - what's your outlook going forward?
    • Earnings will go down even more. The Economic Clock™ is clanging for:
      • Excess demand for money, and
      • Excess supply of goods.
    • Under such a scenario, it is impossible for corporate earnings to improve. Indeed, “layoffs” news has just reached our shores in Hong Kong.
    • This implies that neither turnover nor margins can rise.
  11. Is there anything else you may want to highlight?
    • Obama’s influence on China and vice versa. It seems like Obama will have to go protectionist, as many of his voters expect this. Meanwhile, Chinese officials will start taking their wrath out on the local operations of U.S. multinationals – something which my most recent book, Trade Myths: Globalization and the Trade Balance Fallacy, warns of.
    • Bond blow out. Seems like markets are not quite aware of the extent of public debt that is being created now that the chickens of irresponsibility have come home to roost.
    • Cost push stagflation. We have been bleating on about this since Spring 2006, so at some point this will occur. This will hit particularly those countries/areas whose currencies have fallen the most against the US dollar, e.g. Euroland (rapidly morphing into Neuroland).
p/s photo: Chen Kuang Yi

Comments

buzzy^ said…
Hi Dali-san

30-50% before the market bottoms out? That would bring Dow to 5,000ish level, wouldn't it?

Do you think we would get there in 2009? Brave call, bro! Are you into put warrants? ;)
Datuk said…
In my opinion, this is the best article posted since the past 3 months. Obviously, if one could heel Enzo's advice and strategise it into action that equate to stay away from the market until end of 2009 (require strong discipline and full attention), then, i think at the end of day, the compensation is equal to life's time opportunity for creating wealth with the 3 years average return much better than warren buffe's past record.

Appreciate your effort in publish out this article. It add clarity to my original thoughts and strengthen my investing philosophy.

BTW, just wanted to share that my most recent visit to China last week confirmed my earlier observation......don't rely on china as "force" to mitigate the current slow down in Asia as i don't believe the grwoth factor can continuos at the expense of excessive spending of consumers in USA and western Europe.....

China will be the real loser this times around as the world factory was really hurt by the demand destruction in western europe and USA. Most of the factories located in the special economy zones were practically surmounting with the problem of order less than a week.

I do hope miracle would happend although friend of mine said...human efforts can't help us to ride over this storming sea, we need god to render her help....as the current resuce plan will bring us closely to Japan's experience.....a decade long of recession...

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