staloscapital-macroeconomicscenario2012-111222051601-phpapp02

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MMACROACROCCOMMENTARYOMMENTARY

Stalos Capital2012 Jean Paul PoggiInvestment Director

Conclusion

2012 is going to be a complicated year where it will be dicult to have, as in 2011, core bets in place for the year. The

big queson mark is about the future of the Euro. The answer to this queson brings us to two dierent scenarios:

European leaders are unable to fx the issue and the Euro as single currency collapses . In other words, Germany

decides to go back to the Mark. The value of the Euro will collapse, the dollar will appreciate together with the

Yen and Gold. GBP could be under pressures due to special links between European Union and UK. CAD, AUD,

SF, likely Scandinavian currencies will appreciate too. Uncertaines and less condence will bring Western

economies in recession, impacng also emergent economies. Proteconism will spur an increase of some com-

modies prices which will lead to riots and geopolical risks in some part of the world. The German bund will

remain the safer investment in the world. Most of Europeans countries would need to increase interest rate to

nance their decits, most of them will fall in depression. Corporate bonds will rise becoming safer than most

of government bonds.

European leaders fnd a way to more fscal consolidaon; the euro survives around the countries able to imple-

ment reforms. Some countries go out the euro area to a euro bis or their own currency. In this case, scal con-

solidaon will bring Western economies to an anemic growth, interest rate will remain low for some me, in-

aon will stabilise around 2-3%. Condence will come back and emergent countries will connue prinng

prey high performances, beang the forecasts. Likely the Euro will rally against the dollar, the Yen and the

GBP. AUD, CAD, Real, MYR will appreciate against the dollar which will be the great loser of the year. The US

economy will take advantage of a weak currency. Equity market will move unl a range, volality will collapse.

Stock picking will be the key to make performances. The Fixed income market will remain prey high due to

the persistence of low rate. Italian, French and Spanish bond will rise against German bund. Commodity prices

will be steady.

No one can at this stage make the future. The poor quality of polical leaders has driven the world to a crical situ-aon. With two major elecons in 2012: USA and France, it seems complicated for the same leaders to take

the right decisions. Since July 2007 and the beginning of the nancial crisis, decision makers have taken the

wrong way. Can they be beer in 2012? I do not have the answer.

2012, n1

December 20

Macro economic scenario 2012A complicated Year


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2 - Macro Economic scenario 2012

United StatesThe US: on the road to perdion

The European debt crisis has aracted all

eyes on Europe forgeng the poor econom-

ic situaon in US. Unfortunately, the situa-

on on the other side of the Atlanc is notbright.

The economy expanded less than previous-

ly esmated to 2% in the third quarter as

the risk of another recession prompted

companies to cut inventories for the rst

me in almost two years. Excluding stock-

piles, so-called nal sales climbed 3.6%, the

most since last years fourth quarter. Gains

in retail sales, manufacturing and housing

this quarter, combined with lean invento-ries, raise the odds of the worlds largest

economy will pick up. At the same me,

unemployment and stagnant wages mean

consumer spending has been fuelled by

reducons in savings that cast doubts on

whether increases will be sustained into

2012, just as the risks from government

cutbacks and the European debt crisis inten-

sify.

Corporate prots rose at a slower pace last

quarter, and the gain in wages and salaries

for the period from April through June was

cut by more than half, to $38.9 billion from

$78.7 billion. Consumer spending, about

70% of the economy, grew at a 2.3% annual

rate, lile changed. The savings rate last

quarter dropped to 3.8%, the lowest since

the last three months of 2007. Inventories

were cut at an $8.5 billion annual rate, sub-

tracng 1.6% points from growth, comparedwith a 1.1% previous esmate. It was the

rst me stockpiles were trimmed since the

last three months of 2009. Fewer invento-

ries put producers on track to ramp up out-

put heading into the holiday season. Re -

stocking will boost growth by 0.8% in the

fourth quarter, according to economists at

JPMorgan Morgan.

The jobless rate, which was 9.4% in Decem-

ber 2010, declined to 8.6%. Payrolls have

climbed by 132,000 a month on average in

2011, not enough to create sustainable em-

ployment. A decline in the share of the

working-age populaon, known as the par-

cipaon rate, caused a decline of unem-

ployment, meaning that the economy needs

to create fewer jobs to decrease unemploy-

ment. While some of the decrease has been

caused by discouraged workers dropping

out of the labour force, another driver is

that the baby-boom generaon is starng to

move into rerement. Even if the current

pace is enough to cause a persistent decline

in unemployment over the long term, some

analysts project the jobless rate will end

2012 at 8%. The baby boomers, the popula-

on bulge aer World War II between 1946

and 1964, added 9.4 million people in the

16-24 age group during the 1960s and 7.3

million in the 1970s. Boomers started turn-

ing 65 this year, and every day for the next

18 years, about 10,000 more will hit the age

that historically has been associated with

rerement, according to the Pew Research

Center in Washington. As a result, there are

more inaonary risks with the very accom-

modave monetary policy we have now.

The housing market remains very de-

pressed. A supply of distressed properes in

the foreclosure pipe-line that is weighing on

prices of exisng houses will keep luring

buyers away from new construcon. A job-

less rate that has been hovering around 9%

or higher for more than two years signals

demand will take me to pick-up, a sign

homebuilding will contribute lile to eco-

nomic growth in 2012. The housing market

remains out of balance, with much more

supply than demand. The S&P/Case-Shiller

index of home values in 20 cies slid 3.6% in

September, capping 12 straight months of

declines. Naonally, prices decreased 3.9%

in the third quarter from the same me in

2010. The median second house price

dropped 4.7% from a year earlier. The end

of a temporary halt on foreclosures may

push more properes onto the market, trig-

gering further slides in value that may pre-

vent the industry from recovering for years.

At the best, the housing market will stabilisein 2012. There are sll a lot of depressed

properes in the pipeline that will hit the

market, and demand likely needs to

strengthen above a 5 million annual rate


3/16

3 Macro Economic scenario 2012

to absorb the overhang of unsold homes

and alleviate the downward pressure on

prices. Distressed sales, comprised of fore-

closures and short sales in which the lender

agrees to a transacon for less than the

balance of the mortgage, accounted for 28%

of the total in October sales. A growing glut

of seized properes threatens to weigh on

prices even more. In the third quarter, U.S.

lenders started foreclosures on more

homes, the rst increase in a year, as bank

moratoriums that clogged the pipeline dissi-

pated.

The U.S. lost its last stable outlook from

the three biggest credit-ranking companies

aer Fitch Rangs lowered the naon to

negave following a congressional com-

miees failure to agree on decit cuts. De-

clining situaon makes the probability of a

downgrade greater than 50% over two

years. U.S. government debt rallied the

most since the end of 2008 aer Standard &

Poors stripped the U.S. of its AAA ranking

on August 2011, while global equies lost

$9.7 trillion in market value during that peri-od. U.S. federal debt held by the public will

exceed 90% of GDP by the end of the dec-

ade, while interest on the debt will require

more than 20% of tax revenue. Gross debt,

including local and state governments, will

climb to 110% of GDP during that span. Ac-

cording to some calculaon including some

debt agencies, we are already over this lev-

el. Fitchs acon is a reminder of the need

for Congress to reduce the countrys long-

term decit in a balanced manner and to

avoid eorts that would undo the $1.2 tril-

lion in automac cuts negoated last sum-

mer. The dollars role as a reserve currency

is among the reasons Fitch armed the

U.S.s AAA rang. That does provide a tre-

mendous amount of nancial exibility for

the U.S. However, the value of the dollar is

not anymore in the hands of the FED, but in

the hands of the Chinese government. The

$1.3 trillion budget decit in the scal year

ended Sept. 30 was about 8.7% of GDP, the

third-largest percentage in the past 65

years, exceeded only by the decits in 2009

and 2010, according to Treasury stascs.

U.S. marketable debt outstanding has dou-

bled to about $9.7 trillion since the end of

2007 as tax receipts plunged and the gov-

ernment boosted spending amid the worst

recession since the Great Depression.

Accommodave FED policy: more dollars

have been printed the last ten years than in

all history of United States, interest rate at

0.25% combined with an atone growth and

a quite high inaon give to USA very poor

arguments to be again the world growth

driver. The Presidenal elecon in Novem-

ber 2012 could bring on the table new sm-

uli from the FED or from the current admin-

istraon. President Barack started his presi-

denal campaign one month ago with an

unrealisc plan for jobs. Such measures

could lead the stock markets up on short-

term basis. The dollar could also play a role

of defensive value in case of accentuaon of

the European debt crisis. Besides, big cap in

America are doing extremely well, invesng

in emergent markets and no repatriang

prots in the US. In this case they do notpay taxes. Taxpayers are paying the bill,

corporates have never been so well.

The electoral campaign could bring also

some serious issues for the global trade. A

very fashionable topic is the Chinese foreign

-exchange policy and trade pracces. As

President Obama seeks to reassert U.S. in-

terests in Asia, he is using increasingly

strong language on Chinas trade, currency

and intellectual property policies. The U.S.

contends Chinas currency is kept arcially

low, pung American businesses at a disad-

vantage and driving up Chinese trade sur-

pluses. You do not take in such way about a

country which could decide the fate of your

own currency even if it suits American elec-

tors. The Chinese Foreign Ministry released

a statement saying the U.S. trade decit and

unemployment are not caused by the Yuan

exchange rate and a large appreciaon inthe currency wont solve U.S. problems. It is

not wrong too. Besides, the Yuan has gained

about 8% against the dollar in nominal


4/16


terms since the country ended a two-year

peg to the U.S. currency in June 2010, and

30% since July 2005. In real terms, or ina-

on-adjusted, the gain has been more than

10%, because consumer prices have risen

faster in China than in the U.S. Two-way

trade between the U.S. and China was $457

billion last year and the U.S. decit was

$273 billion. Sll Obama and U.S. businesses

regard China as a growing market for Ameri-

can goods; of the 2.3 million vehicles Gen-

eral Motors delivered in the second quarter,

588,000 were sold in China, where the De-

troit-based company is No. 1 in market

share. A March survey by the AmericanChamber of Commerce in China found 78%

of member companies in the country said

their China operaons in 2010 were very

protable or protable. The last thing the

world needs at the moment it is a commer-

cial war between USA and China. As men-

oned in my previous outlook, protecon-

ism remains one of the biggest threat for

any sustainable growth in the world.


5/16


The Euro area: The end of the Euro or the

emergence of a new Europe

Euro-area governments have to repay more

than 1.1 trillion euros of long and short term

debt in 2012, with about 519 billion euros of

Italian, French and German debt maturing in

the rst half alone. European banks have

about $665 billion of debt coming due in the

rst six months, according to Cigroup Inc.

Clearly, the European debt crisis is likely to

connue and to amplify in 2012. Aer two

years, European leaders did not convince

the world that they are handling the issueproperly .

Italy, the third European economy has to

sell 440 billion euros bonds in the rst part

of the year. If the borrowing cost remains

above 6%, the situaon will not be sustaina-

ble. Mario Mon also needs to persuade the

European Central Bank to connue to back-

stop the countrys debt. The ECB began buy-

ing Italian debt on August 2011 aer the

naon unveiled 45.5 billion euros in austeri-

ty measures, though the eort hasnt been

sucient to stem borrowing costs. The mar-

ket reading about Italy has been a bit unfair.

Italys decit, at 4.6% of GDP last year, is

about the same as Germanys, lower than

that of France and less than half the U.K.s,

at 10.3%. The country already has a primary

surplus, which could send the debt on a

declining trajectory starng next year. The

Debt of 120% does not take into considera-on likely 20%-25% of black economy not

integrated in the real GDP. Sll, anemic eco-

nomic growth and the terrible Berlusconi

image led investors to increase their bets

against Italy during 2011. The big problem

of Italy is not the debt, it is an unstable po-

lical system. I do not believe that the Mar-

io Mon government will survive long, soon

or later Italy could be in polic crisis.

The French triple A is more than in trouble.Frances credit outlook was lowered by Fitch

Rangs at the end of December. Fitchs ac-

on followed reviews announced by Stand-

ard & Poors and Moodys. S&P on Dec. 5

placed the rangs of 15 euro naons on

review for possible downgrade. As collat-

eral, the European Financial Stability Facility

is likely to lose its top credit rang with the

French downgrade. The main weapons

against the European crisis will be seriously

damaged. Macroeconomic gures have

been quite dark for French. Unemployment

rate have climbed to 9.8%, inaon remains

above the target to 2.7% and the country

would be already in recession according to

the Frenchs Insee, the stascal instute.

It said that France is entering a recession

with its output shrinking 0.2% in the fourth

quarter 2011 and another 0.1% in the rstquarter of 2012. French decit will be

around 6% of GDP and the government debt

would be around 87% of economic output,

the most of any top rated euro country.

With presidenal elecon coming in May

2012, I do not expect any fundamental

measures to change the trend of the decits

or the growth. Indeed the choice for French

remains quite limited between the show-

man Sarkosy (24% in the last pool),

Flamby surname of Socialist candidate in

relaon with his smooth character (27%),

fashionable and racist extreme right candi-

date Marine Le Pen (18%) and the boring

center right Franois Bayrou (11%). French

have room to change the direcon of their

economy, but the lack of leadership and

courage could lead the country to a deep

recession. Without any acon at the Euro-

pean level, the cost of nancing debt could

reach 5-6% in the coming six months.

The steady Germany will suer too. Howev-

er, the rst European economy starts a con-

tracon from a strong point. Growth will

slow to 0.6% in 2012 from 3% in 2011 be-

fore recovering to 1.8% in 2013 according to

the Frankfurt-based Bundesbank. This sce-

nario is based on the hypothesis that the

debt crisis doesn't worsen and that the un-

certainty among investors and consumers

gradually lessens. In case of accentuaon of

the debt crisis, Germany could contract in

2012.

Euro area


6/16


Bundesbank President Jens Weidmann has

said he opposes the European Central Bank

stepping up its bond purchases to bale the

debt crisis, and its up to governments tond a lasng soluon. Domesc condions

in Germany remain in place for a broad,

protracted upswing. While the short-term

outlook has clouded over in recent months

and the economy will experience a dicult

period this winter, the decline in unemploy-

ment is bolstering consumer spending. Do-

mesc demand could drive growth next

year while net trade makes a negave con-

tribuon. German export growth will slump

to 3% in 2012 from 10% in 2011 and 18% in

2010. German exporters will clearly feel the

weaker demand stemming from the rest of

Europe. Inaon should slow to 1.8% in

2012 from 2.5% in 2011. The budget decit

will drop around 1% of GDP in 2011 from

4.3% in 2010 and the rao will be lile

changed in 2012 and 2013. German debt

will probably sink to 81% of GDP at the end

of 2011 from 83.2% a year earlier. Bund is

going to stay the safer investment in the

world.

In Spain, the economy grew in 2011 around

0.7%, less than the governments target,

and likely the regions will not meet their

decit goal this year. But the big issue for

Spain is the banking system. Spanish banks

are under pressure to cut property-backed

debt, hold about 30 billion euros of real

estate thats unsellable. Spanish lenders

hold 308 billion euros of real estate loans,

about half of which are troubled, according

to the Bank of Spain. Land in the middle of

nowhere and unnished residenal units

will take as long as 40 years to sell. Only

bigger banks such as Santander, BBVA, La

Caixa and Bankia are strong enough to sur-vive their real-estate losses. Spanish home

prices have fallen 28% on average from

their peak in April 2007. Land prices

dropped by more than 60% in the provinces

of Lugo, A Coruna and Murcia, and 74% in

Burgos since the peak in 2006. Santander

has 9.2 billion euros of foreclosed assets,

followed by Banco Popular with 6.05 billioneuros, BBVA with 5.87 billion euros, Bankia

with 5.85 billion euros, Banco Saba-dell SA

with 3.6 billion euros and Banco Es-panol de

Credito SA with 3.36 billion euros. Dozens of

Spanish banks have failed or been absorbed

since the economic crisis ended a debt-

fuelled property boom in 2008. The cost to

the public of cleaning up the industrys

books has so far been 17.7 billion euros in

the form of share purchases from the gov-

ernment bailout funds known as the FROB.

Banks have made provisions for a potenal

105 billion euros of write-downs since the

market crashed. Lenders may need to make

another 60 billion euros in provisions to

clean up their balance sheets. Spain is strug-

gling to digest the glut of excess homes in a

stalling economy where joblessness is

among the highest in Europe. Unemploy-

ment has almost tripled to 22.6% from a low

of 7.9% in May 2009, according to Eurostat.

Financial instuons have foreclosed on

200,000 homes and that will balloon to as

many as 600,000 in coming years as unem-

ployment connues to rise.

The periphery of European Union is not

beer. Portugals economy shrank for a

fourth quarter in the three months through

September as the government cut spending

and raised taxes to narrow its budget de-

cit. GDP dropped 0.6% more than esmates.

From a year earlier, GDP dropped 1.7%.

Household spending declined 3.3% from a

year earlier, government spending fell 0.4%

and investment dropped 14%. Portugals

economic expansion has averaged less than

1% a year for the past decade. The economywill shrink 3% in 2012 according to Europe-

an Commission forecast. It would be one of

only two euro-area countries to contract,


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the other being Greece with 2.8% negave

growth.

Despite a new government the situaon in

Greece is not beer and no light is at theend of the tunnel. Greek Prime Minister

Lucas Papademos, another technocrat, took

power in Athens, receiving a mandate to

push through budget measures to secure EU

nancing to avert default. Greece will never

be able to pay back money to investors de-

spite a second bailout. Greek GDP contract-

ed 5.2% in Q3 and around 5.9% in 2011.

Unemployment reached 19.5%. While leav-

ing the euro would allow Greece to regain

control of exchange and interest rates, a

September 2011 report by economists at

UBS AG said its new currency would drop

60%, and local borrowing costs would jump

at least 7%, imperilling the balance sheets of

banks and companies. The cost would be as

much as 11,500 euros a person in the rst

year outside the euro and 4,000 euros in

following years. As I menoned since the

start of this crisis, a negoated temporary

Greek exit would be the best soluon for

Greek and Europe. No government in

Greece will be able to impose an austerity

plan to Greek people unl 2020 as Europe-

ans are thinking today. The wind of revolu-

on is blowing in Greece with potenal

huge collateral eects on other countries.

Even Ireland, the best student of the crisis

debt school cannot follow the program im-

posed two years ago by IMF and EU. The

economy shrank 1.9% in the third quarter,

an unexpectedly large drop that raised

doubts about the country's capacity to meet

its decit-ghng targets through painful

cuts. GDP growth forecast for 2012 have

been reviewed down to 1.6% from 2.5%

previously and to 2.8% on average over the

next three years from 3% before, forecasts

sll quite opmisc from my point of view.

As a consequence, the total scal adjust-

ment over the period 2012-2015 has been

increased to 12.4 billion euros. In clear,

more cuts are needed. Beside, structural

issues remain unxed, the property market

is one of them. In the year to September

residenal property prices at a naonal lev-

el fell by 14.3%. Residenal prices fell by

1.5% in the month. House prices in Dublin

are now 49% lower than at their peak in

early 2007, while apartments in the capital

are 59% down. The fall in the price of resi-

denal properes in the rest of Ireland is

somewhat lower at 40%. Overall, the na-

onal index is currently 44% lower than its

highest level in 2007. According to the latest

Reuters survey of Irish economists, house

prices are likely to connue falling for some

me yet. The poll predicts that house prices

will decline by a further 12% on average in

2011, and 6% in 2012. In the meanme, the

number of Irish mortgages in arrears for

more than 90 days grew 11% in the third

quarter, highlighng the growing strains on

the countrys banks and adding pressure to

the government to help struggling borrow-

ers. More than one in 10 Irish home loans

are not being fully repaid and the situaon

is deteriorang as unemployment remains

stubbornly high and house prices connueto fall. The impact on the Bank balance

sheets could become huge and dicult to

monitor.

Europes economic expansion failed to ac-

celerate in the third quarter (+0.2%) as Ger-

many and France struggle to shore up a re-

gion bracing for a recession sparked by an

escalang debt crisis. From a year-earlier,

euro-area GDP increased 1.4% in the third

quarter. It is a poor performance. An eco-

nomic contracon in the current fourth

quarter seems hard to avoid and the risk of

a new recession is becoming more than like-

ly. Recent surveys indicate the pace of

growth wont pick up in the current quarter.

The European Commission in Brussels cut its

euro-area growth forecast to 1.5% this year

and 0.5% in 2012. I personally believe that

the growth will be close to zero at the end

of 2012, assuming that European leadersnd a way to solve the debt crisis.


8/16


Europe is at the dawn of a new area. A lack

of vision, leadership and courage have con-

ducted the European Union to a corner

where drasc choices have to be made. In-

stead of facing only the consequences of

the crisis, European leaders have to nd a

soluon to the causes. The euro currency

was an unnished job giving the monetary

policy to the ECB but leaving the budgetary

policy in the hands of each state. Economy

policy has always two legs: the monetary

and the budgetary policy. It is dicult to run

on one leg, parcularly when the ground

becomes dicult. I said many mes that the

only long term soluon for the euro area isa Eurobond market monitored by an inde-

pendent European agency. It is also the only

way for the Euro to survive. If in 2012, Ger-

man and French cannot nd an agreement

about that, the euro as we know will not

exist at the end of the next year.

The situaon is also socially and economi-

cally unsustainable for many countries like

Greece or Portugal and others. An exit of

the euro area to a new euro bis or to theiroriginal currency has to be organised before

seeing social unrest driving these countries

to some dark sides we do not want to see

again in Europe. This has be organised in-

side a new monetary system managed in

coordinaon with the ECB.

As Europes debt crisis raises the risk of a

recession, companies in the region show no

signs of slowing with growth in earnings

poised to top their U.S. rivals. Net income

for companies in the Stoxx Europe 600 In-

dex will rise by 10.5% in 2012 aer increas-

ing 11% this year according to more than

12,000 analysts esmates compiled by

Bloomberg. The gauge is headed for four

straight years of income growth exceeding

10%, the longest streak since 1998.


9/169 Macro Economic scenario 2012

Developed economies: contrasted realies

Australia and Canada, a commodity story:

in Australia, the economy grew faster than

esmated in the third quarter to 1% aer

1.4% the prior quarter, on consumer spend-

ing and mining-driven investment. Economic

momentum nished the third quarter solid-

ly and recent cuts in ocial interest rates

should help safeguard sectors of the econo-

my most exposed to short-term cyclical

swings. Compared with a year earlier, the

economy expanded 2.5%. Household spend-

ing rose 1.2%, adding 0.7% point to GDP and

non-dwelling construcon jumped 24.4%,

adding 1.5 points. China is Australias big-

gest trading partner and its demand for iron

ore, coal and energy drove up the naons

terms of trade. Mining increased 3.7%, add-

ing 0.3 point. Resource projects valued at

A$456 billion have cushioned a slump in

manufacturing and services hit by a record

currency and subdued consumer spending.

The resource-rich states of Western Austral-

ia and Queensland led growth. Western

Australias economy expanded 8.4% lastquarter from three months prior, and 16.4%

from a year earlier. Private-sector business

investment surged 12.9% from the prior

quarter and 22.7% from a year earlier. The

strong investment outcomes are further

evidence of the massive pipeline of planned

investment in Australia. The naons house-

hold savings rao rose to 10.1%. Australia

will slow a bit in 2012, but its economy will

remain steady. Besides, they can managethe slowdown by decreasing interest rate

currently at 4.25%, the highest of the devel-

oped economies.

Canada grew at a 3.5% annualized pace

from July to September, compared with a

3% gain forecast. Exports of goods and ser-

vices rose at a 14.4% annualized pace in the

third quarter, the fastest since the middle of

2004. Canada is in a unique posion in that

they are less exposed to Europe and Chinaand more heavily reliant on the U.S. With

interest rate at 1% and inaon at 3.2%, the

country is in a weaker situaon than Aus-

tralia, but sll steady enough to ght a new

contracon.

Japan, sll in deaon: Japan: economy

expanded 6% for the rst me in four quar-

ters as exports recovered from a record

earthquake, an expansion that is already

slowing because of weakening overseas

demand. At 543 trillion yen ($7 trillion), eco-

nomic output was back to levels seen before

March 11 earthquake. A sustained rebound

will depend on how much reconstrucon

demand can oset a slowdown in global

growth as Europes debt crisis damps global

condence and an appreciang yen erodes

prots. But likely, GDP will slow very sharply

in the current quarter. Expansions in Asian

naons from China to South Korea to the

Philippines are already showing signs of

cooling. Internaonal Monetary Fund Man-

aging Director Chrisne Lagarde said on

Nov. 12 that Japan needed to swily imple-

ment reconstrucon spending. Personal

consumpon rose 1% from the previous

three months, led by an increase in durable

goods purchases and exceeding forecasts,

and overseas shipments advanced 6.2%.Industrial producon fell in September for

the rst me since the March disaster.

Japans currency advanced to its highest

level since World War II against the dollar.

The Ministry of Finance has been interven-

ing more than they ever have. This policy

helps exporters and it produces liquidity,

but it produces major disrupons in Asia in

terms of compeve devaluaon. Japanese

companies with factories in Thailand havealso had to contend with record ooding in

the Southeast Asian country. Unable to

measure the extent of the damage, Toyota

and Honda Motor Co. have scrapped their

annual prot forecasts. The Bank of Japan

holds interest rate to 0.10% and cut its eco-

nomic assessment as Governor Masaaki

Shirakawa called the European debt crisis

the biggest danger for the naons export-

led recovery. BOJ le its asset-buying fund

unchanged at 20 trillion yen ($260 billion).

The BOJ may bolster smulus again if the

yen resumes its gains aer climbing to post-

war highs against the dollar last month.

Other countries



The economy will face an adverse eect

from the slowdown in overseas economies

and the appreciaon of the yen as well as

from the oodings in Thailand. The risingyen is hurng the protability of Japanese

companies highly depending of exports. It

was quite rare to see a so pessimisc report

from BOJ. I believe BOJ may increase asset

purchases and consider buying longer-term

bonds if a deepening crisis in Europe

prompts the yen to rise further as a haven

currency.

The UK: on the road to stagaon: Britainfaces a 0.5% contracon in the fourth quar-

ter and 0.4% growth in the rst quarter,

according to the Oce for Budget Responsi-

bility. The Naonal Instute for Economic

and Social Research theres a 50% chance

that Britain slips back into recession. The

unemployment rate for 2011 will be 7.9%

for an inaon of 4.8%. The budget decit

would be around 10% of GDP and the total

debt at 84% of GDP. Yes, you did not miss

something, I am talking about the UK econo-

my.

Chancellor of the Exchequer George Os-

borne plans to reduce Britains budget de-

cit is under pressure. Osborne needs to bor-

row an extra 86 billion pounds over the four

scal years to April 2015 as growth forecasts

are lowered to just less than 1% in 2011 and

cut by more than half for 2012. I believe, it

is sll very opmisc. The problem is that

such policy so far has driven the country not

to a recession but to a stagaon. The dete-

riorang outlook means Osborne may have

to extend spending cuts, so that austerity

connues during the rst two years aer

the next general elecon due to take place

in 2015. Jobless claims will rise to 1.75 mil-

lion next year while inaon will fall to its

2% target by 2013, according to opmist

analyse consensus. I am not sure inaon

will fade so much and I believe high com-

modity prices will maintain inaon around

3%.

The weak outlook led the OCDE to say that

the Bank of England will probably add to

smulus early next year as the economy

slides back into recession. The Paris-based

organizaon forecasts the central bank will

increase its asset-purchase target by 125

billion pounds in early 2012, boosng the

program to 400 billion pounds, something

which is totally crazy from my point of view.

The current issues are not solved yet, that

Bank of England is already preparing thenext crisis. Osborne announced scally neu-

tral ways of boosng economic acvity, in-

cluding a 20 billion-pound credit easing pro-

gram in which the government underwrites

small company lending. He also proposed

tapping pension-fund savings to inject 30

billion pounds into infrastructure projects

and extend a child-care program for

260,000 poor children valued 650 million

pounds over three years. In clear, all these

measures are too small to really change a

darkest outlook than ever.

The isolated posion in Europe, which is the

rst Brish commercial partner weakens the

posion of Prime Minister Cameron. With

interest rate at 0.50%, an easy quantave

program boosted at 275 billion pounds, a

domesc demand depressed and exports

down, UK is naked to face the cold of the

coming recession .

Besides, Bank of England has to deal with

serious issues. It introduced a new sterling

liquidity facility to address potenal nan-

cial-market strains as Europes sovereign

debt crisis intensies. The moves indicate

ocials are taking pre-empve measures in

case Europes debt crisis escalates further

and freezes markets. The BOE forecast

about the future of the euro area is prey

clear. It does not believe the euro will sur-

vive.



The Bank of Englands extended Collateral

Term Repo Facility will provide funding

against the widest range of collateral and

will help ensure that banks have sucient

access to sterling liquidity to migate risks

arising from unexpected shocks. The new

facilitys operaons will oer sterling for 30

days against collateral currently allowed for

use in the banks Discount Window Facility

and is open to all banks and building socie-

es that are signed up to the DWF. U.K.

banks have 140 billion pounds of term fund-

ing due to mature in 2012, concentrated in

the rst half of the year, according to the

central bank. Short-term money-market

funding condions have been fragile over

the past few months, with banks nding it

harder to roll over all of their maturing

funding. If current market tensions connue

into 2012, replacing that funding is going to

be real struggle, which will put further pres-

sure on funding costs and deleveraging.

The European debt crisis remains the big

threat. But the scal consolidaon policy

implemented by the Government of David

Cameron did not work. It failed to provide

soluons to a crisis which is rstly global

and not only naonal.

Emergent markets sll growing

Russia, the biggest commodity exporter in

the world: GDP expanded 4.8% in Q3 from ayear earlier, the fastest pace since the se-

cond quarter of 2010, aer increasing 3.4%

in the previous three months, below the

median expectaon of 5%. The worlds larg-

est energy exporter is counng on domesc

consumpon to balance shrinking demand

abroad as Europe ghts to staunch a debt

crisis. Prime Minister Vladimir Pun, who

will run for president next year, is seeking

annual growth of between 6% and 7% and

turn the economy into one of the worlds

ve largest. Fixed-capital investment surged

8.5% from a year earlier in September,

while unemployment fell to a more than

three-year low. Retail sales jumped 9.2% in

the biggest increase since October 2008

aer a 7.8% gain in August. Growth in con-

sumpon and retail lending is connuing

with 30% annual increase in credit growth.

Agriculture also made a substanal contri-

buon to growth last quarter. Russian farm-

ers harvested 95 million metric tons of

grain, according to the Agriculture Ministry.

Thats about 50% more than in the same

period of 2010 and bolsters the industry

following the countrys worst drought in at

least a half century last year. The sovereign-

debt crisis in Europe, Russias most im-

portant export market, is hurng demand

for manufactured goods. Industrial produc-

on grew 3.9% in September from a year

earlier, the slowest pace since it began ex-

panding in October 2009. Manufacturing

stalled in the July-September period,

posng the worst performance since the

fourth quarter of 2009 and leaving produc-ers to face lasng stagnaon aer foreign

sales weakened. The economy will match its

pre-crisis level by the end of 2011, taking

twice as long to recover compared with the

1998 crisis that followed the governments

default, according to Renaissance Capital.

Russias economy grew at an average annu-

al rate of 7% during Puns presidency from

2000 to 2008 before plunging 7.8% in 2009.

The government forecasts a 4.1% expansion

in 2011.

Is South Africa sll a winner? Growth in

South Africas economy, the biggest in Afri-

ca, stayed near a two-year low in the third

quarter as Europes worsening debt crisis

undermined demand for exports and mining

output slumped. GDP rose an annualized

1.8% in the three months through Septem-

ber. The economys recovery has weakened

as the Europe, which buys about a third of

South Africas manufactured exports,

threatens to fall into recession.



Finance Minister Pravin Gordhan on Oct. 25

cut his growth forecast for this year to 3.1%

from 3.4%, less than half the 7% expansion

that the government says is needed to meet

its jobs pledge. Business condence

slumped to its lowest level in a year in the

third quarter as demand for manufacturing

exports weakened. Investors have dumped

South African assets as growth weakened

and risk-appete waned. The rand has

plunged 21% against the dollar this year, the

worst-performer of 16 major currencies

tracked by Bloomberg. Slower growth may

threaten the governments target of cre-ang 5 million jobs by 2020, which is need-

ed in order to reduce the unemployment

rate to 14% from 25% currently. The econo-

my is forecasted by the government to ex-

pand 3.4% in 2012 and 4.1% in 2013.The

Reserve Bank, led by Governor Gill Marcus,

has kept its benchmark interest rate un-

changed at a 30-year low of 5.5% this year

to support growth, even as price pressures

increased. Inaon accelerated to the top of

the banks 3% to 6% target range in Octo-

ber. No country can actually escape the fall

out of the global uncertaines that are cur-

rently prevailing. Indeed, the European en-

vironment holds many uncertaines and

possible unthinkable consequences. South

Africa remains an interesng country to play

on the long term with many uncertaines

on short-term.

Turkey, the new Eldorado? Turkeys 8.2%

economic growth in the third quarter was

the worlds fastest behind China. Exports

are growing faster than imports and helping

the worlds 17th-largest economy reduce its

trade gap. Turkey may beat the 4% econom-

ic-growth target set out by the government

for next year as its current-account decit

ceases to be a risk, according to Industry

Minister Nihat Ergun. The government will

idenfy areas that are contribung to Tur-

keys 12-month cumulave trade decit of

$78.6 billion, or about 10% of GDP, and cre-

ate investment incenves to plug the gap.

The Internaonal Monetary Fund forecasts

that GDP expansion in Turkey will slow

sharply to 2% due to weaker capital inows.

The Turkish economy was growing too fast

for its own good in the rst three quarters

and were going to have to see a major ad-

justment. Policy responses were insucient

to prevent the development of a large cur-

rent-account decit and high inaon. Mon-

etary policy shied to an unconvenonal

mix of reserve requirements, the interest-

rate corridor, and the policy rate, which hasnot demonstrated it can deliver price or

nancial stability. Now, the threat is that

Europes sovereign-debt crisis will cut de-

mand for Turkish exports and reduce the

inows needed to nance the current ac-

count, leading to a plunge in growth rates.

Almost half of Turkeys exports go to the

European Union.

Brazil, a future leader: the worlds second-

largest emerging market aer China, con-

tracted for the rst me in 2 1/2 years in

the third quarter aer policy makers raised

borrowing costs and the European and U.S.

debt crises hurt condence. As a result, eco-

nomic growth for the whole of 2011 will

slow to 3% from 7.5% the previous year.

Since August, President Dilma Rousses

administraon has cut the benchmark inter-

est rate three mes, slashed taxes on con-

sumer goods from pasta to refrigerators and

eased curbs on credit. Earlier this year the

government cut taxes on payroll, exports

and small companies and agreed to a 14%

increase in the minimum wage eecve

January, measures that are equivalent to a

combined scal smulus of 39 billion Reals

($21.7 billion). The government also plans

to raise public investment to about 1.2% of

GDP in 2012. The measures taken this year

and further central bank reducons in inter-

est rates are enough to make sure the



Economy will resume growth and pick up

speed unl annualized GDP expansion

reaches 5% in the nal quarter of 2012. GDP

shrank 0.17% in the three months ended in

September on an annualized basis. Growthin the whole of 2012 will likely be 4% and

inaon will be less than 5%. Traders are

wagering policy makers will cut the bench-

mark interest rate by an addional 125 basis

points by the end of April from 11% in Janu-

ary. Economists expect GDP to expand no

more than 3.5% in 2012, according to the

latest central bank survey taken a day aer

the smulus package was announced. They

forecast consumer prices will rise 5.5%. The

country could also use internaonal re-

serves to provide credit for Brazilian export-

ers as was done during the 2008 credit

crunch. Internaonal reserves held by the

central bank rose to $353 billion on Dec. 9

from $239 billion in 2009.

The government plans connue to rely

more on interest-rate cuts than scal smu-

lus to spur economic growth, and scal poli-

cy will be relavely neutral in 2012.

Rousses 2012 budget proposal targets a

surplus before interest payments of 139.8

billion Reals for the federal, state and local

governments, or 3.1% of GDP.

South Korea: economy expanded in the

third quarter to 0.8% as exports of cars and

metal products increased. The economyexpanded 3.5% from a year earlier, beang

the banks October esmate of 3.4%. Goods

exports increased 1.6%, private consump-

on gained 0.4% and government spending

rose 1.4%. Overseas shipments connue to

drive the economy, expanding a more-than-

expected 13.8% in November. Meanwhile,

industrial producon unexpectedly fell 0.7%

in October from September, the h decline

this year. South Koreas economy will grow

by 3.8% in 2012 according to the OCDE.

India, a fragile giant: the economy grew in

Q3 at the slowest pace in more than two

years to 6.9%. That was the weakest expan-

sion since the second quarter of 2009.

Prime Minister Manmohan Singhs eorts to

smulate growth are being hamstrung by

corrupon scandals that have stalled legisla-on for a year, and polical outcry against

foreign investment in retail. The Reserve

Bank of India has also been constrained in

supporng the economy as it struggles with

inaon thats al-most twice the rate in

China and higher than in Brazil and Russia.

The currency has slumped 14.4% against the

dollar this year. Manufacturing in India grew

2.7% in the three months through Septem-

ber from a year earlier, slower than the

7.2% gain in the previous quarter. Invest-

ment by companies and the government

declined 0.6%. Indias benchmark wholesale

-price inaon was 9.73%. The central bank

has boosted the repurchase rate by 375

basis points in 13 moves since the start of

2010, the fastest round of increases since

the monetary authority was established in

1935.

Developing East Asia sll in re: Despite

dicult me for developed economy, Asia is

sll booming. Asian naons have scal

scope to cushion its economy from an esca-

laon in Europes debt crisis. Developing

East Asia which excludes Japan, Hong Kong,

Taiwan, South Korea, Singapore and India,

will see its expansion moderate to 7.8% in

2012 from 8.2% in 2011. Asia, which led the

world out of the 2008-2009 recession, is

poised to withstand the blows from any

slump in demand for its exports or pull-back

in credit by European banks.

China, a so landing? Europes deepening

nancial crisis and a faltering recovery in the

U.S. will weight on prots. More than 60%

of Chinese companies that sold bonds in the

past six months invest in the real estate

market, where sales are weakening under

government curbs.



The slowdown of the economy will become

more prominent in the next two quarters.

The government can support growth by

ramping up state housing construcon,

while moderang inaon may leave roomfor a loosening monetary policy. Chinas

economy can avoid a so-called hard landing

with an expansion of more than 8% next

year, the economy grew 10.4% in 2010 and

likely 9.1% in 2011. The government intensi-

ed property measures this year with limits

on mortgages and restricons on home pur-

chases in about 40 cies. October housing

transacons declined 25% from September

and prices fell in 33 of 70 cies. Seventy-

four of 121 companies that led bond pro-

spectuses since May with Chinabond, the

naons clearing-house, count one of their

main businesses as real estate, have proper-

ty subsidiaries or invest in the market. Most

Chinese builders face payment delays from

developers as the pace of construcon

slows amid ghter credit and a slowdown in

home sales. About 80% of construcon

companies said developers were behind on

payments. Most economists expect Chinas

government to loosen some scal or mone-

tary policies without cung interest rates as

inaon remains elevated. Domesc de-

mand remains buoyant. Industrial compa-

nies sales climbed 29.1% to 68.18 trillion

Yuan for the rst 10 months of the year.

China can also use its $3.2 trillion in foreign

exchange reserves to rescue the economy.

The country learned from the 1997 Asian

Financial Crisis that it needs to keep large

reserves to maintain liquidity in order to

honour obligaons.

Inaon reached a 14-month low to 4.2%

and industrial producon rose less than

forecast to 12.4%, bolstering the case for

more smulus measures to shore up growth

in the worlds second-largest economy. So-

cially, the situaon could become quite dan-

gerous for the government. Even if Inaon

may average about 4% in 2012, the inaon

calculaon has been changed at the begin-

ning of the year 2011 underesmang food

prices. So the reality of inaon is likely to

be above 5%-6%.

With inaon down and ocials seeing an

increase in domesc costs and a slowdown

in overseas demand pung severe pressure

on its exports next year, policy makers may

have lile appete to allow faster gains in

the Yuan. Chinas export situaon is quite

serious and growth in shipments in Novem-

ber was slower than the previous month.

Exports rose 10.9% last month from a year

earlier, according to the median esmate of

32 economists in a Bloomberg. That would

follow a 15.9% increase in October which

was the slowest pace since gains resumed in

December 2009 aer the global nancial

crisis, excluding holiday distorons.

China is going to slow likely to 8% growth

and inaon would remain in real close to 5

-6%.

Commodity will remain at high level de-

spite the slowdown

Food commodity, a crisis at the corner:

China reaped its seventh record corn crop in

eight years in the harvest ending in 2011.

That sll wont be enough to meet demand,

driving a vefold gain in imports as prices

head for the highest-ever annual average.

Producon reached 189.2 million metric

tons in the harvest that began in Septem-

ber, 6.7% more than a year earlier, accord-

ing to a survey of growers in the seven main

producing regions carried out by Geneva-

based SGS SA for Bloomberg. Imports in the

markeng year that began last month may

jump to 5 million tons from 1 million tons.

While the supply predicted in the SGS sur-

vey would exceed the U.S. Department of

Agricultures esmate by more than 7 mil-

lion tons, rising imports show farmers are

failing to grow enough grain for livestock

feed.



The vefold expansion in Chinas economy

in the past decade reported by the World

Bank spurred a change in diets. The dairy

herd almost tripled since 2000, and per cap-

ita pork consumpon in the naon of 1.34

billion people rose 26 %. The demand is just

too strong. The USDA said that China

bought 900,000 tons of corn, the most since

a 1.45 million-ton purchase in 1994. Chinese

demand rose 50% since 2000 as output

gained 38%. China became a net importer

for the rst me in 14 years in 2010. China

is entering a golden age for consumpon.

Consumpon of the meat in China, which

produces about 50% of the worlds supply,

will rise 3.5% to a record 51.56 million tons

in 2012 from a year earlier. Corn producon

in China will likely fall 11 million tons short

of demand by 2015. Imporng corn to make

up the decit would rank the country as the

worlds second-biggest buyer aer Japan.

The country may need to import as much as

7 million tons of corn and 4 million tons oflower-quality wheat next year to feed its

hog, poultry and dairy herds, according to

AgResource Co, a research company in Chi-

cago. The world is facing an agriculture crisis

in the coming two years. The Crisis could

also be exacerbated by climate changes.

Yingluck Shinawatra became Thailand rst

female prime minister by pledging to li

rural incomes through higher rice prices.

The rest of Asia had to pay in 2011 for her

campaign promise. Yingluck has said the

government will buy grain from farmers at

15,000 baht ($502) a ton at harvest in No-

vember, above current market rates of

9,900 baht. Thailand is the worlds biggest

rice exporter and Asia accounts for 87% of

global consumpon. Rice, the staple food

for about half of the global populaon, hassurged about 55% in the past years. The last

ood in Thailand could also be a source of

price rising. Agriculture Minister Theera

Wongsamut said that the dams didnt re-

lease large volumes earlier because of con-

cern rice farms may be ooded during the

harvest. While Thailands ferle oodplains

have helped the country remain the worlds

biggest rice exporter for the past three dec-

ades, they also form a natural basin that

slows the drainage of water through the

Chao Phraya River toward Bangkok and the

sea. The naons largest dams are storing

64.9 billion cubic meters of water, or about

93% of their capacity, compared with 52.3

billion cubic meters at the same me last

year, the Royal Irrigaon Department said

on its website.

Other food commodies are also on the

uptrend. Sugar prices may rise above 25

cents a pound from the third quarter of

2012 aer booming out in the second

quarter, according to Macquarie Group.

Prices will remain under pressure in the rst

half of 2012 as exports from the European

Union, Central America, India and Thailand

increase. India is the worlds second-largest

sugar producer and Thailand the second-

biggest exporter. Prices will receive support

at 20 cents a pound, below which Brazilian

mills will favour ethanol or become un-

protable. Mills in Brazil can use their raw

material to produce either sugar or ethanol.

Sugar output in India totalled 30.8 million

tons in 2006-07, aer recovering from a

14.2 million tons crop in 2004-05, according

to data on the website of the U.S. Depart-

ment of Agriculture. Producon slumped

again to 15.95 million tons in 2008-09 be-

fore rising to an esmated 28.3 million tons

in the current season. Top global producer

Brazil may not be able to increase sugar

output in the 2012-13 seasons, which starts

in April there, due to the low rate of cane

replanng and potenal dry weather.

Coee futures are expected to rally in the

rst half 2012 from current sluggish levels

on limited supply of arabica beans.


16/16

Arabica coee is grown mainly in Lan

America and favoured by Starbucks to make

specialty drinks. Brazilian growers are reluc-

tant to sell, as origin stocks are slim, and

being well nanced, can aord to do so.

With both the Colombian crop and Brazils

2012 crop being downgraded, the market is

geng ghter. Brazil is the worlds largest

coee producer.

Cocoa supplies will outpace demand for a

second year in the season started in Octo-

ber, with a very good start to the current

main crop in West Africa.

Food commodity prices have been at the

origin of some revoluons. People in the

street of Cairo or Tunis asked rst for bread

instead of freedom. The current riots in Chi-

na are caused mainly by an increase of ina-

on which makes the life of poor people

more dicult. India where two-third of the

populaon is leaving in the property has lost

control of 25% of his territory to Maoist

rebels in the last ten years. All this events

have one common point: food prices.

Energy and metal: prices stabilisaon: As

main analysts forecast, I do not believe that

energy and non-precious metal prices will

collapse in 2012. The world growth is slow-

ing but not contracng. Advanced econo-

mies are in crisis, but not emergent econo-

mies. Brazil, Russia, India, China and all East

Asia will connue to grow with huge needs.

Demand from emergent economies will

match the decrease of consumpon in west-

ern economies. The Internaonal Energy

Agency raised its forecast for global oil de-

mand to 1.3% annually over the next ve

years on economic growth in China, cauon-

ing that gains in prices threaten the recov-

ery. Consumpon will increase to 95.3 mil-

lion barrels a day in 2016 from 88 million

barrels a day in 2010, with China accounng

for about 41% of the gain. Crude prices are

weighing on the developed naons.

The resilience of emerging economies,

which navigated relavely unscathed

through the rough waters of the recession

of 2008 to 2009, will likely alter the balance

of global economic power. Prices around

$100 are weighing down an already-fragile

macroeconomic and nancial situaon in

the OECD. I am expecng a barrel between

$80-$95 in 2012.

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