Here comes summer…and the sun is shining bright... but the forecast says rain...

Bill Blain’s Morning Porridge – March 21 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

Something’s afoot and we don’t know what it is. My finely honed market ‘spidey-sense’ tells me markets are uncertain as to how the next strategic shift is going to rile prices. The implications of ‘something happening’ in China are one of two big factors overhanging markets this morning. The other is that intangible moment when it's time to say ‘good bye bonds, hello stocks’ as the US economy continues onto a clearly discernible growth path. Do the two mutually exclude each other?

Let’s start with China

‘Hard Landing’ according to JP Morgan. ‘Soft Landing’ according to other investment institutions. Or is the current ‘slowdown’ in China growth simply part of the long-term development path of the Chinese economy? Sure, there is an apparent housing bubble and other problems – notably corruption – but I suspect much of the recent noise, panic and flame fanning on the Chinese economy is overplayed.

There is an excellent primer note from Martin Wolf on China demographics

and labour costs in this morning’s FT. It’s obvious any sniffle in China growth could trigger a major outbreak of flu across global recovery expectations. Yesterday, sure enough, China sneezed and commodity-based economic entities like Australia and BHP were admitted to the coronary crash units.

And it’s not just going to be commodities. It could hit Europe. One thing I’ve said many times about Germany’s favoured status is Europe is the price inelasticity of German exports – especially cars - meaning they can sell as many cars as they can produce at whatever price they care to charge into China. Or at least they could till suddenly it looks like the bottom may fall out of China imports.

Second China factor to think about is politics – and the indistinct and unfounded rumours yesterday of a coup by a Maoist faction led by ‘princeling’ Bo Xilai. (His father was Mao’s right hand man during the Cultural Revolution – so kinda weird to hear a multibillionaire leading the crowd in songs praising Mao!)

The big challenge faced by China’s leadership is keeping its billions content – either through job/wealth creation, or by stopping resentment between the haves and haves not. That China’s rubber stamp parliament contains more billionaires than congress is noteworthy.

I’ve an excellent book in my schoolbag at the moment by Italian economist Loretta Napoleoni: ‘Maonomics – Why Chinese Communists make better Capitalists than we do.’ It’s well worth a perusal.

Loretta gave me some solid sound advice last night – ‘Bill: the West has been waiting for China to fall for over 20 years. They know what they are doing – focusing on the domestic market, expanding national health for old age and pushing modernisation in Western China. They are addressing inequality and hence the rumours of dissent within the party.’ (Not often I highlight a comment in the porridge… but that’s a critical one.)

Yet the immediate threat of a global demand shock from China clearly whapped markets yesterday. I suspect that calms pretty quickly – and expect to see the Chinese remain major and increasingly influential players across technology and energy sectors.

Another concern re China is the state of its debt markets and the degree to which Local Government and State Enterprises have massively leveraged themselves up – and where that money got siphoned off to. There is a tale to tell.

The bottom line is China is now a major driver of the global economy and it's as critical to understand it as the US or Europe...I’ve got a pile of Chinese history books on the shelf.

Back in Yoorp…

Ben Bernanke notes financial stresses in Europe are easing. (Are they? Nope... they just been pushed further under the carpet.) In Portugal we have EC admitting recapitalisation needs will be ‘challenging’, and that some state banks will need additional capital.

Meanwhile…how is the political debate in Germany going to develop as Merkel ponders how she is going to ask for more money for the EFSF/ESM firewall? That is going to be interesting...

Big news from Italy was Monti failing to placate unions yesterday – we’ve warned a couple of times his new technocratic government has foundations build on sand. Without being about to secure union support for much-needed labour reforms – and he has already cut a number of side deals – then all that Italy has really achieved is its banks blagging some €260bn from the ECB to invest in BTPs!  

It all points to the current ‘everything fine and dandy with Europe’ mood shortly being overturned. Some research we saw from European banks was interesting – suggesting the big risks include a reversal of the current US growth expectations, rising oil prices,eurozone ructions and the China/BRIC cycle.

And back here in London... how much poorer will I be after the budget? who knows?

Out of time..