Biotech Values

[oc631]

For readers who don’t have the time or inclination to read the post on the Barron’s Roundtable in #msg-58842662, the following paragraph is pretty close to the consensus view of the panelists:
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Beijing will engineer a soft landing, because China has structural unemployment issues and a recession would create political havoc. Europe will suck it up and continue to bail out the European Union's weaker members. In the U.S., Bernanke's quantitative easing has stimulated the stock market. When is that over, and what happens next? I don't know. Barack has moved toward the political center, which has improved confidence among executives and investors. The U.S. is OK, and Europe will muddle along. China grows 7%, 8%, 9%. That gets us to 2012, which looks better.

I'm somewhat surprised you picked Gabelli's comments to use as a consensus view for the roundtable. I actually stopped reading at your quoted paragraph because what he says ignores all the structural problems with China and Europe which impact the U.S. directly. Why he's included in the roundtable each year is anyone's guess.

This weeks "Thoughts from the Frontline", John Mauldin's weekly newsletter, should be read to counter Barron's bullish outlook on the year ahead (the focus on Irish elections is especially interesting). Gabelli's mention of "structural unemployment issues" in China are in fact structural employment issues which are a driving force of China's runaway inflation. As highlighted below

Has China Found a Miracle Business Cycle



Quickly, let’s look over the Pacific Ocean to China. They seem to have repealed the laws of business-cycle gravity, going from one fabulous growth year to the next. Most analysts are predicting another solid year of high single-digit growth. And that is the base-case scenario. But what if the unthinkable happens?

Official inflation is in the high single digits. Unofficial inflation may be running closer to 20%. Simon Hunt wrote last year:

“Our friends in Beijing talk about the daily cost of living rising at an annual rate of around 20%. In Shanghai gas prices to the home have risen by some 600% in two years and electricity by over 300%.”

More recently he wrote:

“The large increase in minimum wages announced after Christmas have two powerful implications. First, de facto, they suggest that actual inflation is higher than is being shown in the official CPI data; and, second, that China’s pool of surplus labor is drying up. The latter has important implications for wage inflation and the structure of manufacturing.

“Beijing announced an increase in minimum wages of 21%, after raising them by 20% in June this year. Across China every municipal authority has already raised its minimum wage with most only six months ago. Further hikes are possible early this year. Wage increases of this size are more than can be warranted by normal living adjustments. They reflect an abnormal rise in inflation and a tightening labor market.”

The Chinese central bank keeps raising reserve requirements for banks, and is slowly allowing interest rates to rise. Can the Chinese central bank engineer a soft landing with inflation so high?

I am not sure about this year, but I do know this: no country has ever figured out how to repeal the business cycle. Eventually there is a recession. And when China has a recession, the rest of the world will feel it, just as the world responds to a US recession. Recessions are just nature’s way of wringing out excesses. They are not permanent. In fact some research suggests that the longer a recession is delayed, the worse the excesses get. This is yet another situation we will need to give close attention.

As an aside, I think the inflation predicament China finds itself in will give the Chinese some reason and room to gradually allow the renminbi to rise against the dollar. And the country is to be applauded for recently allowing more free trading of their currency in the US. Eventually they will float their currency, as it cannot become a real candidate for a reserve currency until they do. But that is clearly what they would like to see. It is just a matter of time.