Inflation cycle

With increasing signs of a global economic slowdown, I have been wondering whether the inflation cycle has turned down. Singapore and Hong Kong, for examples, recently reported subdued inflation.

Other recent news indicate that, after a long boom, housing prices in some markets at least have started to fall. Yesterday, the Nationwide building society reported that house prices in the UK fell 0.2 percent this month, the second time in three months it has fallen. The annual rate of increase of 12.7 percent was the lowest in three years. Nationwide expects property price increases to moderate further in 2005. Similar predictions have been made for Australia, which had, until recently, also been witnessing a housing boom.

However, such signs are absent in the US. And in other parts of Europe, inflation indicators in Germany and Italy actually turned up in December.

So maybe global inflation is not quite on the way down. If you are waiting to load up on bonds, it may pay to wait a little longer.

Who's financing the US

Brad Setser continues to look at who's financing the US.

How Europe finances the US
Europeans invest in emerging Asia... Rather than financing a current account deficit in emerging Asia, the capital inflow from Europe finances reserve accumulation in emerging Asia. Most of those reserves are invested in US dollars. The net effect: ... the central banks of Asia -- not Europe's private investors -- get stuck with the risk that the dollar will fall v. emerging Asian currencies... Sustaining the current pattern of global growth requires that Asian central banks subsidize both European private investors and Asian exporters...

Look who is supporting the mortgage market ...
No Surprise: the People's Bank of China. The PBOC has shifted from buying treasuries (03) to buying mortgage backed securities (04). From Reuters: "... Net foreign purchases of MBS were $242 billion in mid-2004, up $19 billion from year-end 2003 and $35 billion more than 2002, according to Inside MBS & ABS, a publication of Inside Mortgage Finance... The strong performance of the $4.5 trillion MBS market in 2004 can partly be attributed to buying from Asian portfolios and China's central bank in particular, according to Steven Abrahams, fixed income mortgage strategist at Bear Stearns..." You might say the recent surge in housing prices was made in China ... like many other gifts exchanged in the past few days.

Yes, many things now come from China. Which is why I find it slightly amazing that in the West, there is still a relative lack of awareness of events pertaining to China. For example, the Capital Chronicle admits to having had no knowledge of "the recent happenings involving China Aviation Oil" and its derivative losses until recently (see "Burnt by oil derivatives, CAO sits out market rally").

Americans especially would be well-advised to get to know their creditors better.

US economic outlook good but Japan's mixed

The economic outlook for the US continues to be better than for Japan.

The Conference Board in the US reported yesterday that its Consumer Confidence Index has rebounded in December and now stands at 102.3, up from 92.6 in November.

Meanwhile, in Japan, following the previous day's industrial output figures, the economic indicators reported yesterday were mixed.

The unemployment rate fell to 4.5 percent in November from 4.7 percent in October as the number of people out of work dropped 400,000 to 2.9 million. Full-time employment rose 0.6 percent in November, the eighth consecutive monthly rise. Part-time work increased 2.6 percent, lower than the rise of 4.0 percent in October.

Spending by salaried workers' households in November fell 0.7 percent year-on-year after a gain of 0.1 percent in October. Overall income at salaried households was up only 0.5 percent compared with a year earlier.

At the same time, deflationary pressures persist. November core consumer prices, which exclude fresh food costs but include energy, were down 0.2 percent year-on-year and fell 0.3 percent from October.

These data indicate to me that further strengthening of the yen against the US dollar is warranted.

November output up in Japan but down in Singapore

Japanese industrial production rose in November for the first time in three months.

Japan Nov industrial output rises 1.5 pct mth-on-mth
Industrial output in November rose a seasonally adjusted 1.5 pct from the previous month, slightly below expectations, preliminary data issued by the Ministry of Economy, Trade and Industry (METI) showed. The METI forecast that production will fall 0.9 pct in December, but will rise 2.8 pct in January. Industrial production in November was projected to have increased 1.7 pct from October, according to the average of forecasts from 22 research institutes polled by the Nihon Keizai Shimbun...

Singapore's manufacturing sector, however, continued to slow down in November.

Monthly Manufacturing Performance - November 2004
Total manufacturing output increased 13.2% in November compared to last November with strong growth in the biomedical manufacturing, transport engineering and chemicals clusters. Excluding the biomedical manufacturing cluster, November's output grew 7.3%. The three-month moving average for total manufacturing output grew 9.0%. However, the seasonally adjusted month-on-month index declined by 3.8%. The cumulative total manufacturing output for the first eleven months this year increased by 13.0% compared to the same period in 2003.

The key number, of course, is the 3.8 percent decline in seasonally-adjusted month-on-month output.

This slowdown does not bode well for the Singapore stock market, as I discuss in "Slowing economy may weigh on Singapore stock market".

Earthquake and tsunami in the Indian Ocean

2004 has been a year of natural disasters. After just getting through a period of hurricanes a few months back, an earthquake off Indonesia and the tsunami that it triggered has killed thousands of people and made many more homeless around the Indian Ocean.

Economists are not expecting widespread impact on Asian economies from the disaster. Travel-related industries like the airlines and tourism will be affected, but the impact is likely to be limited to those serving the areas hit by the disaster. Sri Lanka, especially its tourism industry, is likely to get hurt, as is Thailand, although probably to a much smaller extent. Oil production in the Indonesian province of Aceh in northern Sumatra, near the earthquake's epicentre, does not seem to have been affected.

Some stocks closed lower yesterday in reaction to the disaster. Predictably, these included Thai Airways, down 3.5 percent, Airports of Thailand, down 2 percent, Singapore Airlines, down 0.9 percent, and Star Cruises, down 2 percent.

In Europe, Club Med, which has resorts in Thailand and the Maldives, slipped 1.4 percent, while travel operator TUI AG dropped 1.1 percent. Insurers were also affected, with Munich Re falling 1.5 percent and Swiss Reinsurance Co. falling 1.8 percent.

Short-term SGS bonds more attractive than long-term ones

fundsupermart.com thinks that short-term Singapore government bonds are now more attractive than long-term ones on a risk-adjusted basis. The following is an excerpt from its article "Time To Take Profits On Your Long Term SGS Bonds!":

In the last 12 months, Singapore government bond yield curves have flattened with yields of longer-term SGS bonds falling and yields of shorter-term SGS bonds rising. This means that the gap between the yield of longer term bonds and short-term instruments have narrowed substantially. This suggests that on a risk-adjusted basis, short-term instruments look more attractive. Thus, it would be beneficial for investors to take profit on their longer-term SGS bonds (i.e. 15-year benchmark SGS bonds) and invest in shorter-term bonds (where yields had risen).

I tend to favour shorter-term bonds myself as I think long-term bond yields have fallen too fast, probably due to strengthening demand for Singapore dollar assets in anticipation of the currency's appreciation.

However, if capital continues to flow into the market in anticipation of further strength in the Singapore currency, or if the Singapore economy weakens faster than expected, yields along the entire curve may fall, in which case long-term bonds provide a bigger bang for the buck. The other problem with short-term bonds is that their yields are actually lower than Singapore's inflation rate!

November economic indicators for US, Singapore and Hong Kong

Yesterday, the US Commerce Department reported that personal income and disposable personal income (DPI) in the US both increased 0.3 percent in November while personal consumption expenditures (PCE) increased or 0.2 percent. In October, personal income and DPI had increased 0.6 percent while PCE had increased 0.8 percent, based on revised estimates.

In real terms, DPI increased 0.2 percent in November, the same increase as in October, while PCE increased by less than 0.1 percent in November compared with an increase of 0.4 percent in October

Although the consumer spending figures look anaemic, an AFP report indicates that some analysts remain sanguine about consumer spending.

"While this could be considered cause for concern, I look for a big rebound in December," said Steve Stanley, economist at RBS Greenwich Capital Markets. "Auto sales likely posted a rally in December for the third straight year, holiday sales should turn out to be decent if not spectacular, and prices, led by energy, almost certainly are falling," he said...

"November's spending gain, in combination with the strong increase in October, sets us up for a solid holiday sales showing," said Wachovia economist Gina Martin... "The picture is clouded so far by individual retailers and same store sales that have failed to meet expectations but in the aggregate sales are on pace to record a holiday season at least equivalent to last year," Martin said.

The report also mentioned that the University of Michigan's consumer sentiment index rose to 97.1 in December from 92.8 in November. It was also up from an early-December reading of 95.7.

Don't write off the American consumer yet.

Another report from the Commerce Department showed that new orders for manufactured durable goods in November increased 1.6 percent. This followed a 0.9 percent decrease in October.

On the whole, the US economy looks as though it remains relatively resilient.

Meanwhile, halfway around the world in Singapore and Hong Kong, inflation remained subdued in November. In Singapore, the consumer price index in November, at 104.3, was unchanged from October. Compared to a year ago, it rose 1.7 percent. In Hong Kong, the consumer price index rose 0.2 percent year-on-year in November, the same growth as that recorded in the previous month.

These figures should help keep interest rates in these economies low, especially in Singapore, where liquidity should be boosted by the inflow of capital anticipating further rises in the currency against the US dollar.

US 3Q GDP and Japanese Nov trade surplus

Yesterday, the US Commerce Department released its so-called final estimate of US gross domestic product (GDP) for the third quarter of 2004. Growth is now estimated at an annual rate of 4.0 percent, up from 3.9 percent in the previous estimate. Second quarter growth had been 3.3 percent. The upward revision to the percentage change in third quarter GDP primarily reflected a downward revision to imports.

At the same time, the Commerce Department reported that corporate profits in the third quarter were down US$55.9 billion or 4.8 percent from the previous quarter. From the year-ago quarter, profits were up 5.8 percent. Profits in the third quarter were reduced by $79.7 billion dollars because of hurricanes.

Earlier yesterday, Japan's Finance Ministry reported that the country's trade surplus in November fell 39.2 percent from a year earlier, its first drop in three months. While exports grew 13.4 percent, imports jumped 28 percent as a result of rising prices of raw materials, especially oil.

The trade surplus with the United States was up 12.3 percent while that with the European Union edged up 1.1 percent. Japan's trade surplus with Asia, however, fell 27.2 percent.

Meanwhile, there are, as usual, some great posts on the current account deficit and exchange rates at the two Brads' weblogs: "Rollover Crisis?" and "Martin Wolf explains the fall in the renminbi-dollar".

Rise in November US leading indicators

The US economic outlook gets some relief as the Conference Board's index of leading indicators rose in November.

The U.S. Leading Index Increases after a Five Month Decline
The Conference Board announced today that the U.S. leading index increased 0.2 percent, the coincident index increased 0.1 percent and the lagging index decreased 0.1 percent in November.

The leading index increased in November, following five consecutive declines. In addition, the weakness in the leading indicators in recent months has become somewhat less widespread. It is too early to conclude that the recent weakness in the leading index was only a pause in the rising trend, but to date the decline was not large enough and did not persist for long enough to signal an end to the current economic expansion...

The leading index now stands at 115.2 (1996=100). Based on revised data, this index decreased 0.4 percent in October and decreased 0.2 percent in September. During the six-month span through November, the leading index decreased 1.1 percent, with five out of ten components advancing (diffusion index, six-month span equals fifty percent).

As the six-month change shows, the trend is still down. So I don't expect to see any significant acceleration in the economy in the coming months. The rise in the index, however, may give bulls justification to push stocks up for a year-end rally.

Everybody is exporting to the US

From his analysis of the US October trade data, Brad Setser points out that China's rapid export growth is no longer just due to the shift of production from other Asian economies to China.

[T]he facts have changed: US imports from China and the Asian NICs are now both growing strongly. In 2004, overall imports from the Asia Pacific region are set to rise by 17%, or by about $70 billion. That is faster than the overall rate of increase in all imports -- 16% -- and all the more impressive because the US is not importing oil from Asia(oil imports are likely to increase 30%). Imports from China are set to rise by over $40 billion, and to reach $190 billion -- an amazing 28% y/y increase. But imports from the NICs and Japan are also rising -- imports from the NICs are set to increase by $13 billion, or 14%. China's export growth clearly stems from more than just the shift of production lines from Asian NICs to China.

This is consistent with what I had pointed out in "US demand and Chinese production". In that commentary, I had cited Morgan Stanley economist Daniel Lian's research in saying that "developed economies like the US have probably felt the brunt of the rise of China's manufacturing capability in terms of lost jobs and investment in recent years, rather than other emerging economies, as has often been believed".

Basically, the surge in US imports have been so large that all the Asian economies have benefited. The question is what happens once the US import machine slows down.

Kasriel's Christmas commentary

Paul Kasriel, director of economic research for The Northern Trust Company, wrote his last commentary for the year on 16 December. Some gems:

Flow-Of-Funds Stocking Stuffers
On December 9, the Fed released its flow-of-funds data updated through the third quarter of this year. Herewith are some "stocking stuffers" fashioned from these data.

... In the two quarters ended Q3:2004, the 30-year mortgage rate increased a minuscule net 29 basis points (based on quarterly averages of interest rates). But in that same period, an index of housing affordability declined by 9.44% (not annualized). Maybe this is why adjustable-rate interest-only mortgages are becoming so popular. Even with relatively low 30-year mortgage rates, many folks are not finding homes affordable given the sharp rise in the value of residential real estate...

In recent years, households have joined with the government in being net demanders of funds from the rest of the economy -- U.S. and global. That is, we now spend more than we earn, making up the difference by borrowing or selling off some of our previous saving... In the four quarters ended Q3:2004, households' net demand for funds averaged about $241 billion. How else were we going to pay for all of those SUVs, plasma TVs and McMansions? What is so remarkable about households being net demanders of funds now is that so many of them are baby boomers who have entered their prime saving years. One would think that as the retirement finish line is coming into view for these baby boomers, they would be stepping up their financial saving, having already bought their McMansions...

... [I]n the third quarter, household debt as a percent of the value of total household assets -- tangible as well as financial -- increased to 17.4%, just shy of the post-WWII high of 17.5% set back in the first quarter of 2003. Mind you, households' debt-to-asset ratio went up despite the fact that the value of their houses rose by a record amount.

... Curiously enough, after decades of being net demanders of funds, nonfinancial corporations have become net providers of funds to the economy. That is, corporations are not spending all of their after-tax after-dividend cash flow on capital equipment and inventories... What makes it especially unusual is that the cost of capital -- be it equity or debt capital -- is so low now. This suggests that the expected return on capital in the U.S. might be unusually low now.

... In the late 1990s, there was a surge in foreign direct investment in the U.S. Foreign entities were building factories in the U.S. and buying up U.S. corporations. That was a genuine demonstration of confidence in the American economy. All right, it was a mistake, but it still was a genuine vote of confidence. In recent years, foreign direct investment has been replaced with foreign official (foreign central bank) financing of our external deficit. This foreign central bank financing of our external deficit is not a vote of confidence in the American economy. Rather, it is a manifestation of Asian mercantilism...

What may be of most direct and immediate relevance to stock investors is his statement: "the expected return on capital in the U.S. might be unusually low now".

Investors usually accord a higher multiple to stocks when interest rates are low, since the discount rate is also low. However, if the return on capital is low along with interest rates, conceivably, the earnings growth rate would also be low, possibly even be negative. Under such circumstances, there is no reason to accord a higher multiple to stocks despite the low interest rates. This in turn implies that stocks in the US may not be undervalued, as claimed by many, especially those who use the so-called Fed model of stock market valuation.

From what I can see, however, this is a possibility that many analysts and commentators don't seem to want to face up to.

US CPI up modestly in November

Moderating oil prices helped keep consumer prices in the United States down in November, according to the US Labor Department. The consumer price index (CPI) was up only 0.2 percent after a 0.6 percent jump in October. The core CPI -- excluding energy and food -- was also up 0.2 percent, maintaining the pace in October.

In the face of likely further declines in the US dollar, it remains to be seen whether inflation can be kept low going forward. Having said that, the fact that it has kept as low as it has despite strong economic growth in the US and surging commodity prices worldwide testifies to the residual deflationary forces that linger in the global economy and which gives the Federal Reserve reason to raise interest rates at a "measured" pace.

US 3Q current account deficit hits record while investment in China slows in Nov

The Commerce Department yesterday reported that the US current account deficit increased to US$164.7 billion in the third quarter of 2004 from a revised US$164.4 billion in the second quarter. Although this was a new record, it was less than what many economists had expected, due to a rise in payments by foreign insurance companies for hurricane-related damages. Exports were up 2.0 percent, while imports were up 2.3 percent.

The latest figures put the current account deficit at 5.6 percent of GDP.

The current account deficit, of course, means that capital has to flow to the US. This, however, has not stopped capital from flowing to China at the same time.

Yesterday, the National Bureau of Statistics of China reported that fixed-asset investment in urban areas rose 24.9 percent in November from a year earlier to 571.8 billion yuan, or US$69.1 billion, after climbing 26.4 percent in October. This represents a moderate slowdown in investment, which should please the Beijing authorities.

US trade and capital data for October

The US trade deficit grew 8.9 percent in October to a record US$55.5 billion. Excerpt of the report:

U.S. International Trade in Goods and Services
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total October exports of $98.1 billion and imports of $153.5 billion resulted in a goods and services deficit of $55.5 billion, compared with $50.9 billion in September, revised. October exports were $0.6 billion more than September exports of $97.5 billion. October imports were $5.1 billion more than September imports of $148.4 billion... Deficits were recorded, in billions of dollars, with China $16.8 ($15.5), the European Union (25) $9.3 ($7.7), OPEC $7.2 ($6.7), Japan $5.9 ($6.1)...

In the meantime, foreigners continued to buy US financial assets, but at a decreasing pace. Excerpt from the US Treasury Department press release:

Treasury International Capital (TIC) Data For October
Gross purchases of domestic securities by foreigners were $1,222.7 billion in October, exceeding gross sales of domestic securities by foreigners of $1,159.4 billion during the same month. Foreign purchases of domestic securities reached $63.3 billion on a net basis in October, relative to $64.7 billion during the previous month. Private net flows reached $49.1 billion in October. Official net purchases of U.S. securities were $14.2 billion in October, relative to $13.0 billion in September... Net foreign purchases of both domestic and foreign long-term securities from U.S. residents were $48.1 billion in October compared with $67.5 billion in September.

Note that the US$48.1 billion of net foreign purchases of US assets is the lowest in a year. It is also lower than the current account deficit in the first two quarters of the year as well as the trade deficit for October. This obviously is not sustainable.

US raises rates as Japanese business confidence dips

The Federal Reserve raised interest rates yesterday as practically everyone expected.

US raises key interest rate to choke inflation
The Federal Open Market Committee voted unanimously to raise the federal funds target rate, which commercial banks charge each other overnight, by a quarter percentage point to 2.25 percent... "The committee believes that, even after this action, the stance of monetary policy remains accommodative," the policymakers said, a clear hint that more must still be done to quit the days of cheap credit.

Today, the Bank of Japan reported its quarterly Tankan survey results.

Japan's key Tankan confidence index dips as expected
Business confidence at large Japanese manufacturers fell in December, the first drop in seven quarters, the Bank of Japan said Wednesday in its quarterly Tankan survey. The large manufacturers' index fell exactly in line with the average economist forecast at plus 22, down from plus 26 in the September survey, which was a 13-year high. The index of large non-manufacturers was at plus 11, unchanged from the previous survey but one point better than the average forecast.

The Tankan survey indicates further slowdown in the Japanese economy, but from an investment point of view, it -- like the Federal Reserve interest rate hike -- has probably already been discounted.

What would be of greater interest is whether the Japanese economy actually slips into recession next year or the following year. Economists are still not very clear on this.

China states stand on foreign exchange reserve

The People's Daily Online has an article about how China manages its foreign exchange reserve. The following paragraphs attributed to a Chinese government spokesman were especially interesting:

China carries out the handling for the foreign exchange reserve structure in accordance with the long-term and strategic structure standard without taking the advantage for profiteering from a short-term exchange fluctuation. If not to engage in the exchange of currencies or not to use them actually the increase or decrease of the value brought about by the changing of exchange rates for the reserve can only be indicated in account and will not have any immediate effect of gains or losses...

The foreign exchange reserve held by the central bank (PBOC) is fundamentally for maintaining a macro-economic stability... It is not only good for strengthening the international settlement...but also good for coping with the unexpected events, preventing from the happening of systematic financial risk and maintaining the security of the national economy.

It is sure that certain amount of cost is necessary for the keeping of foreign reserves... However, should the overall macro-economy or financial system be mired into a vibration or even crisis the whole country and society will have to pay a hell lot of cost for it... So far as I know the financial situation in the central bank (PBOC) go fine and there is no such thing as the loss suffered as the media put it.

What this means is that China is prepared to face forex losses for the sake of macroeconomic stability. So don't be too ready to assume that the renminbi peg will go any time soon.

Offshore outsourcing: Who gains, who loses

A recent Businessweek article looks at the effects of globalisation and offshore outsourcing on the US and concludes as follows:

[I]f white-collar offshoring swells enough, the resulting job losses could undercut a large swath of U.S. consumers...and more than half the U.S. workforce of 130 million could feel the impact. Then, economists conclude, the benefits of globalization would flow mostly to companies and shareholders who profit from the cheaper labor, with little pass-through to workers and consumers.

Brad DeLong disagrees:

Pass-through to consumers is very large. Workers making tradeables (and their households) lose; workers making non-tradeables (and their households) gain; shareholders gain.

And I might add that the recipients of outsourcing gain too. In fact, it is perfectly conceivable that the gains in emerging economies may be so large that there may be a net loss in developed economies but still leave a net gain globally.

Which leads to Brad DeLong's other post yesterday on the US government's intention to impose new curbs on imported clothing, which will adversely affect China:

[T]he U.S. has a *massive* national security interest in encouraging the industrialization of China as fast as possible. A poor China is an unstable China, and unstable countries ruled by oligarchies often turn to aggressive expansion as a way of using nationalism to slow the crumbling of their rule. A world sixty years from now in which Chinese schoolchildren are taught that the U.S. did what it could to speed Chinese economic growth is a much safer world for my great-grandchildren than a world in which Chinese schoolchildren are taught that the U.S. did all it could to keep China poor.

The Chinese, however, are quite ready to argue for their own interests.

Protectionism goes against free trade
The US Government should seriously think over the impact of any protectionist trade policy on the global trade order and make the right move. The WTO arrangements of trade are a double-edged sword for a specific economy as each country has its advantages and disadvantages in competition with others. China, for example, will see its farmers suffer greatly from cheaper imports after its full WTO accession.

The US side needs to re-evaluate its trade policy to live up to its free-trade advocator trademark.

Free trade arguments, however, may be no match against self-interests.

Oracle earnings, retail sales beat forecasts

News flow from the US yesterday was good.

Oracle's earnings top forecasts
Oracle Corp., posted a gain in fiscal second-quarter earnings Monday that beat Wall Street forecasts. The report was released three days earlier than originally scheduled because the company also announced it had finally reached an agreement to buy rival PeopleSoft...

Redwood Shores, Calif.-based Oracle reported fiscal second-quarter net income of $815 million, or 16 cents per share, up from $617 million, or 12 cents a share, a year earlier. The results topped the 14-cent-a-share consensus estimate of analysts surveyed by First Call...

Nov Retail Sales Edge Up as Car Sales Dip
The U.S. growth outlook got a boost on Monday with the release of stronger-than-expected retail sales data that helped cement views the Federal Reserve will raise interest rates again this week. The Commerce Department said retail sales rose 0.1 percent in November, compared with a Wall Street forecast for a 0.1 percent decline. In addition, October was revised up sharply, to plus 0.8 percent versus the more modest 0.2 percent gain initially reported.

October business inventories data from the Commerce Department reinforced the impression of consumer spending gathering momentum in the fourth quarter, with retail stocks advancing less than expected as sales grew...

Stripping out autos, retail sales were up 0.5 percent, compared with forecasts of a 0.3 percent advance and an upwardly revised 1.1 percent increase in October, signaling a solid start to the holiday shopping season. On a 12-month basis, retail sales excluding autos have grown 8.6 percent...

The US consumer continues to perform wonders. But it does leave one wondering: How long more can it last?

Why Asians support the US dollar

General Glut thinks that East Asian central banks' willingness to support the US dollar is because of their need for US military support (see his posts here and here post). It's an interesting point, although I think the main reason for East Asian support for the dollar is to promote exports and stave off deflation.

Yes, I know deflation looks like last year's topic. Strong economic growth and rising prices over the past year have caused most people to shift their attention to inflation instead.

But Asian countries still remember the financial crisis of 1997-98 that wrecked their economies. That crisis was induced by rising economic competition -- particularly from China -- as well as excessive debt accumulation in the region. While the crisis pushed Asian currencies down, it was the fall in the currencies that eventually saved their economies by boosting exports. The Asian economies have had a proclivity towards weak currencies ever since.

And understandably so. The economic conditions that induced the financial crisis and threatened deflation in 1997-98 -- the competition from China and high levels of debts -- have not dissipated.

And yet, all this US dollar-buying may prove to be self-defeating if Asian central banks' reserves get wrecked by the fall in the currency, while the authorities in these Asian countries fail to do enough to restructure their economies to promote domestic demand to compensate for a potential fall in exports.

Indeed, Brad Setser thinks that central banks may be "fools" for buying US dollars. In The Global Test", he warns that this may not go on forever:

Japan...probably should be running a current account surplus and building up external assets that it can draw down on once its population starts to shrink -- but it also probably should be financing emerging Asia, not the US...

What could cause the system to break? A US that seems oblivious to the global test. A decision from China to take losses now rather than bigger losses in the future, no matter how painful. A US current account deficit that keeps on expanding on the back of consumption growth fueled by low interest rates beyond the amount of financing that is available from China and those countries that feel compelled to match China to keep their own currency from appreciating.

This is no way to run our global economy...

I have more comments on the US dollar in "The falling US dollar and rebalancing of the US current account".

For more of my past comments on deflation in Asia, see the following:

Deflation in Japan keeps yields low

Fight against global deflation must involve Asia

Stocks rise amid deflation confusion

Housing market looks vulnerable

The Economist warns that the housing boom is looking shaky.

In its report titled "Flimsy foundations", The Economist points out that house prices are falling in Britain and Australia, but are still rising in the US and France. But in all these countries, prices are at historical highs.

Calculations by The Economist suggest that house prices have hit record levels in relation to incomes in America, Australia, Britain, France, Ireland, the Netherlands, New Zealand and Spain. In other words, ratios of prices to incomes are now above levels that have proved unsustainable in the past. Taking the average ratio of house prices to incomes in 1975-2000 as a baseline, American house prices are now almost 30% overvalued...

Japan provides a nasty warning of what can happen when bubbles burst. Japanese property prices have dropped for 13 consecutive years, by a total of 35% from their peak in 1991. Yet the 36% rise in real house prices in Japan in the seven years to 1991 was actually less than the increase over the past seven years in all but one of the eight countries listed above where prices appear overvalued.

According to The Economist, some economists thinks that the housing market is prone to bubbles. One reason mentioned is imperfect information: "no two houses are exactly alike and there is no central exchange where prices are instantly recorded". Another reason is the absence of short-selling, which often serves to moderate price rises in other markets like the stock market. A third factor that tends to encourage bubbles is that when property prices rise, the value of property as collateral rises, allowing banks to lend even more.

Calling the housing market a bubble is one thing. Knowing exactly when it will burst is what most people really want to know.

In my opinion, if anything is going to burst the housing bubble, it will be rising interest rates. With most economists expecting the US dollar to fall over the coming months, that looks to be a likely scenario in the US. The US housing market looks increasingly vulnerable.

See also "No bubble in housing?"

Consumer outlook in Japan, US and Singapore

Japanese consumer sentiment remains weak.

Japan Nov consumer confidence index rises to 47.9 from 47.7 in Oct
Japan's consumer confidence index rose to 47.9 in November from 47.7 in October, the second straight monthly rise and the fourth in five months, the Cabinet Office said. Yet the survey also found that a majority of Japanese surveyed continue to hold a pessimistic outlook for their own economic wellbeing, indicating consumer spending may remain basically weak... The headline index and the four sub-indices all remained below 50 in November.

There is some improvement in the US.

US Consumer Sentiment Up in December
The University of Michigan's preliminary reading of its consumer confidence index for December was 95.7, up from November's final reading of 92.8, according to market sources who saw the subscription-only report. Analysts on average had forecast that the index would edge up to 93.5. The survey's index of current conditions gave a preliminary December reading of 106.8, up from a final November reading of 104.7. Its index of consumer expectations gave a preliminary December reading of 88.8, up from November's final reading of 85.2, market sources said.

Consumer sentiment in Singapore also looks as though it needs a lift.

Retailers say Singapore consumers remain cautious on spending
The Singapore economy may have been rebounding this year but retailers say consumers have remained cautious about spending. Retailers who have seen a pick-up in business tend to be those in tourist areas like Orchard Road.

If anything is going to perk up consumer sentiment in Singapore, however, it is not likely to be a booming property sector.

More than 18,000 homes lying vacant
Singapore has 18,689 vacant private homes - the highest figure in at least eight years... The stock of 18,689 empty private residential properties at Sept 30 is an increase of 4 per cent over the preceding three months, figures from the Urban Redevelopment Authority show... The pool of 18,689 empty homes at end-September translates to an overall vacancy rate of 8.5 per cent for the total stock of Singapore's 219,740 completed private homes.

Then again, a strengthening currency may help lift spending in Singapore, as with the other Asian countries.

China's trade surplus grows but inflation moderates in November

China's politically-sensitive trade surplus continued to grow in November. Calls for a renminbi revaluation are likely to get louder.

China's Trade Surplus Grows for 4th Month
China's monthly trade surplus widened in November for the fourth straight month, hitting $9.9 billion as exports surged at an annual rate of nearly 46 percent, the government said Thursday. Imports grew at an annual rate of 38.5 percent to a five-month high of $51.1 billion, while exports hit $61 billion, according to customs statistics...

However, in a sign that the Chinese authorities are succeeding in cooling down the economy, consumer price inflation moderated in November.

China's inflation slows sharply in November
China's inflation slowed sharply in November, kept in check by slower price rises for food as government efforts to rein in the economy began to bite. The National Bureau of Statistics said the November Consumer Price Index (CPI) rose by 2.8 percent year-on-year, compared with 4.3 percent in October and 3.0 percent in November 2003. The figure was sharply down on gains of 5.2 percent in September and 5.3 percent in both August and July.

Of course, with its currency pegged to the US dollar, Chinese monetary policy is strongly influenced by US monetary policy, which makes its inflation battle a very tricky one.

Debt growth in US accelerated in third quarter

The latest Federal Reserve Flow of Funds Accounts show that debt growth in the US accelerated in the third quarter.

Total debt rose at a seasonally adjusted annual rate of 7.4 percent in the third quarter, up from the 7 percent rate of the previous quarter. On a seasonally adjusted basis, federal debt growth fell to an annual rate of 5 percent in the third quarter from 10.7 percent the previous quarter. However, nonfederal debt accelerated, with household debt rising at an annual rate of 9.1 percent in the third quarter compared to 8.5 percent the previous quarter, and business debt rising at a 5.1 percent rate compared to 3.6 percent the previous quarter.

The acceleration in debt growth has provided the fuel to pull the US economy up from its second quarter slowdown. The question, of course, is how much longer this fuel can last.

Going contrarian on the US dollar

In his Bloomberg column, Mark Gilbert warns about selling the US dollar.

Questions to Ask Before You Sell That Next Dollar
The dollar is about as popular as a broken toy on Christmas morning. It seems to set fresh lows against the euro on a daily basis, while the threat of renewed yen sales by Japan hasn't arrested its slump. The Bush administration may welcome dollar weakness as a balm for its trade and current-account deficits. The European and Japanese administrations have failed to talk the U.S. currency higher. In the past week, the dollar reached 101.83 yen, its weakest since January 2000, and a record $1.3470 per euro.

Before you jump on that bandwagon, here are some key questions, all of which address the same basic point: Do you really want to own euros and yen?... Investment banks are elbowing each other out of the way in a race to post the lowest dollar forecast. Whenever "everyone knows" about a one-way bet, it's often time to consider becoming a contrarian. One of the strange axioms of financial markets is that everyone agrees there's no such thing as a free lunch, until they think they spy a plateful of gratis set in front of them. Do you really think betting against the dollar is a free lunch?...

The Fed funds rate, currently 2 percent, is heading north. By contrast, the Bank of Japan's 0.15 percent benchmark rate and the European Central Bank's 2 percent lending rate are headed east at best; the ECB may even cut rates by half a point next year, according to economists at Goldman Sachs Group Inc...

"Buy low, sell high" is a pretty good trading tactic. "Own the currencies of countries with strong economies" has also proven to be an efficient strategy over the years. Are you sure you want to contradict this maxim?... The U.S. economy grew 3.9 percent in the third quarter, outpacing the 0.3 percent rate for the 12 nations that share the euro, and the 0.2 percent growth rate achieved by Japan. The OECD is predicting U.S. growth of 3.3 percent in 2005, compared with 1.9 percent for the euro region and 2.1 percent in Japan.

Do you really want to own euros and yen?

In the first part of his article, Gilbert suggests a possible contrarian play. That's an interesting thought, to which I'll come back later.

But the second part, which suggests that the stronger economy in the US should be reflected in the currency, is something which I have dealt with before. As I have said previously -- most recently in "End in sight for fall in US dollar?" -- a stronger economy does not necessarily correlate with a stronger currency, especially when the economy is driven by consumption and deficit instead of investment and surplus. If anything, the reverse may be the case.

Having said that, the US dollar has indeed been reversing some of its losses over the past few days. The reason, according to dealers, is "technically-driven position-adjustment" (see "US dollar extends rebound in Tokyo early afternoon trade"). The longer-term trend, though, remains down. In other words, the US currency has fallen too fast, but not necessarily too far, especially against the Asian currencies.

And the latter, ultimately, may be the undoing of Gilbert's theory regarding going contrarian. While private foreign exchange traders may be short on the dollar, Asian central banks are still effectively long on the currency. And with their large holdings of US dollar assets, the Asian central banks' position may better represent the "consensus" than the private traders.

In which case going long on the US dollar can hardly be said to be contrarian.

Slowdown in economy and technology continues

Economic news from Asia today suggests the economic slowdown continues.

Core machinery orders keep falling, gov't cuts assessment
Japan's core private-sector machinery orders in October shrank for the second straight monthly decline, the government said Thursday as it cut its assessment of the key economic indicator for the second consecutive month. Core machinery orders, which are considered a leading indicator of corporate capital spending six to nine months ahead, fell a seasonally adjusted 3.1 percent to 900.1 billion yen, the Cabinet Office said. The figure represents an unadjusted 9.9 percent drop from a year earlier -- the first decline in nine months...

China's November industrial output up 14.8 percent
China's industrial output in November rose 14.8 percent year-on-year after a 15.7 percent gain in October, official data shows. The National Bureau of Statistics (NBS) said the monthly figure slowed from 17.9 percent for the same month last year, while output for the first 11 months of 2004 grew 16.8 percent, unchanged from the same period last year...

The corporate news from Asia and overnight from the US -- particularly from the technology sector -- suggests the same.

Taiwan's TSMC sales keep falling in November
Taiwan Semiconductor Manufacturing Co., the world's leading contract microchip maker, has reported a continued slowing in sales, with November down 8.6 percent from October due to a fall in shipments and the weakening US dollar. Sales in November came in at 20.99 billion Taiwan dollars (650 million US), down from 22.97 billion dollars in October but up 13.4 percent year-on-year...

Xilinx, Altera cut targets for current quarter
Xilinx and Altera, the two largest manufacturers of programmable microchips, both cut their sales goals for the current quarter late Wednesday. Also, both companies said they expect inventory to rise to worse-than-expected levels...

Hopes for Japan to contribute to world economic growth must be fading rapidly by now. China and the US remain the only significant engines of world economic growth.

As for the technology sector, the optimism provided by Intel last week appears to have been erased by the latest reports from Xilinx, Altera and TSMC.

Japanese third quarter growth revised downwards

Japan's economy is in danger of stalling.

Data Revision Shows Japan's Economy Grows
Japan's economy grew at an even weaker pace during the quarter ending Sept. 30 than initially reported, according to revised government data released Wednesday. The world's second largest economy grew 0.2 percent in annualized terms from the previous quarter, the new numbers showed, down from the period's 0.3 percent growth rate reported last month...

An earlier report on Japan's leading economic indicator gives little reason to expect much improvement soon.

Key index hints at a slowdown in Japan
Japan's index of leading economic indicators fell below 50 percent for a second month in October, the government said Tuesday, signaling a possible economic slowdown. The index, which measures job offers, consumer confidence and other indicators of future activity, fell to 20.0 percent from 33.3 percent in September, the Cabinet Office said in Tokyo. A reading above 50 percent signals growth in three to six months...

I am not hearing too many economists actually predicting a recession in Japan at the moment. Still, with the US dollar expected to fall further in the near future, the risk of a recession for Japan's export-dependent economy is real. Perhaps the rise in the yen will energise the domestic sector and stimulate consumer spending enough to offset the potential fall in export growth.

However, Morgan Stanley's Andy Xie did warn yesterday on CNBC that Japanese consumer spending is "an eternal dream". And investors need more than a dream to base their investments on.

Dow 36,000 resurrected

I have always felt that the authors of Dow 36,000 were over-optimistic when they wrote the book. I think that they -- or at least James Glassman -- remain over-optimistic today. Glassman is now trying to dispel the notion that they had been over-optimistic by claiming that the book was "not a prognostication".

Dow 36,000 Lives!
Five years ago, economist Kevin Hassett and I wrote a book called Dow 36,000. The book made the bestseller lists and won accolades... For some, however, the book became an object of derision because...the Dow hasn't actually risen to 36,000 yet.

This is a good time to review the case we made in the book -- a case in which Kevin and I still strongly believe. Dow 36,000 was not a prognostication. Sure, the Dow will hit 36,000 and probably, eventually, 360,000. But I don't know exactly when, and I don't believe investing is a game of forecasting what's going to happen tomorrow or next year...

Brad DeLong, in referring to the above article, attempts to set the record straight.

And Today's Winners of the Mendacity Sweepstakes Are...
The authors of Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market pretend, once again, that their book did not say what it said...

However, those of us unlucky enough to own Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market can go to our bookshelves, pull it down, and read that "the Dow should rise to 36000 immediately"--i.e., in October, 1999. But Hassett and Glassman say, they are going to be cautious and conservative. They are not going to forecast that the Dow will rise to 36000 tomorrow, but instead they "believe the rise will take some time, perhaps three to five years..." (p. 18).

Valuing the stock market is always a tricky exercise because although the mathematical equation that determines the value is simple enough, the variables that go into the equation are difficult to estimate. And to make things worse, small errors lead to large discrepancies in valuation.

The authors' main guilt, in my opinion, is not in forecasting the Dow at 36,000, but in the misleading over-confidence that they displayed in making their forecast.

China's expanding influence

Rumours of a tie-up between China's no. 1 PC maker Lenovo and IBM have just become more concrete, with reports of the former acquiring the latter's PC business.

Lenovo suspended amid reports on IBM PC sale
Shares of Lenovo were suspended Monday morning amid reports that China’s biggest computer maker is in talks to acquire International Business Machines's PC operations... People familiar with IBM said last week the US information technology group planned to sell the bulk of its PC business, while analysts have said Lenovo was the most likely buyer.

IBM and Lenovo had both declined to comment on the sale, but such an acquisition would mark a dramatic expansion of overseas clout for the Chinese company... That such a sale can even be considered underlines the growth in global ambitions of leading Chinese companies...

Indeed, China's influence on world business is getting to the stage where everybody else has an interest in what happens in the country and the policies being pursued by the government.

Key economic policies mapped out for 2005
Further macro control and restructuring will top China's economic agenda next year, the Central Economic Conference decided Sunday. Other major tasks for 2005 include promoting rural development, economic reform, further opening to the outside world and social harmony. The goal is to "maintain steady and relatively fast economic growth with more emphasis on quality and efficiency," the three-day conference concluded...

I discuss China's influence further in "The impact of China on the world economy".

Play conservatively, hedge your bets

In a recent commentary at CBS MarketWatch, Mark Hulbert points out that among the 11 funds most recommended by market-beating newsletters are three bond funds. An additional three funds invest in international stocks. The remaining five are US equity funds, none of which were "bear" fund that gains whenever the market declines.

His interpretation of these picks is that the best performers think that aggressive bets on the market moving either up or down should be avoided, and that "now is the time to play it conservatively and hedge your bets by diversifying widely."

In another commentary, Hulbert dismisses the prospect of Richard Russell of Dow Theory Letters issuing a buy recommendation despite the market's recent strong rally. As Hulbert puts it:

"The essence of Dow Theory concerns itself with VALUES," he wrote just before Thanksgiving. And even if the DJIA were to confirm the Dow Transports by rising above the 10,738 level, the stock market according to Russell would by no stretch of the imagination represent good fundamental value. After all, price/earnings ratios remain sky high and dividend yields are incredibly low.

On this interpretation of Russell's writings, a Dow Theory buy signal will not get issued for quite some time -- not until P/E ratios fall towards the low end of their historical range and dividend yields rise to the high end of theirs. Absent a monumental crash, that is probably years away.

This, as far as I can interpret, is basically saying that we are not ready for a secular bull market. Which seems fair enough. What I think most people want to know, though, is whether the cyclical bull market that began in 2003 is over.

Barry Ritholtz tries to answer that question using -- in his words -- "a rather esoteric technical pattern" (see his comments to my earlier post) in "Three Peaks and the Domed House redux".

No clear indication on US economy nor stock market

The employment numbers released yesterday by the US Labor Department showed a disappointing 112,000 increase in new jobs for November, well below the consensus forecast of about 200,000. The unemployment rate fell 0.1 percentage point to 5.4 percent as expected.

On the other hand, business activity in the non-manufacturing sector increased in November 2004, according to the latest non-manufacturing Institute for Supply Management Report On Business. The Business Activity Index for November was 61.3 percent, up 1.5 percentage points from October's 59.8 percent.

A 1 December SmartMoney review of several Wall Street analysts' forecasts on the US stock market's prospects showed no clear consensus.

Charles Schwab's Liz Ann Sonders was one of the more bullish analysts. She essentially argues that many investors will feel flush this time of year as they receive their year-end bonuses. The liquidity from these bonuses and the entry of those investors who have been waiting for a dip in stocks should boost stocks during the final month of the year, she argues. Sonders also argues that technically, the post-election rally that broke the previous downward trend is an indication of better things to come.

Lehman Brothers' Henry Dickson is also feeling optimistic. He is sanguine about the expected 2005 profit slowdown. According to him, since 1950, there have been 12 major episodes of year-over-year profit-growth deceleration from peak to trough, of which on only three times has that led to negative stock returns. "Decelerating profits are not necessarily ruinous for the stock market's prospects," he writes. "The market is much more correlated to changes in valuation, P/E ratios, and the like, than to changes in earnings momentum."

Smith Barney's Tobias Levkovich is less sanguine about the profit slowdown. He says that analysts have not reduced their estimates sufficiently for next year. When that finally happens, stock prices will likely slide. However, he thinks that that would put the market at fair value and represent a compelling buying opportunity for investors in 2005.

Merrill Lynch's Richard Bernstein is concerned about the Federal Reserve's intention to withdraw liquidity. He thinks that at such times, lower-quality stocks tend to underperform. On the other hand, if profits were to re-accelerate in late 2005 or 2006, they might be a counterbalancing force to the Fed's restrictive policies and make lower-quality stocks more attractive.

So there is not much consensus on Wall Street at the moment for the investor to follow or take a contrarian stand against. Make your own assessment and bet accordingly.

Singapore PMI falls, Intel provides silver lining

Singapore continues to see its economy decelerating, with its purchasing managers' index falling 1.2 points to 50.3 in November. Main contributors to the fall were the sub-indexes for new orders, new export orders, employment, inventory and input prices. The electronics sub-index came in at 51.3, down one point from October.

A silver lining from yesterday, however, was the report that Intel has raised its revenue outlook for the current quarter to a potentially all-time high of $9.3 billion to $9.5 billion, up from an earlier target of $8.6 billion to $9.2 billion. This suggests that there is still life in the electronics sector, a major component in Singapore's manufacturing.

Burnt by oil derivatives, CAO sits out market rally

Like most of Asia, the Singapore stock market rose strongly today on the back of the overnight fall in oil prices. The Straits Times Index closed at 2062.76, up 1.2 percent.

One stock that did not participate in the rally was China Aviation Oil (CAO), which had been suspended after reporting a loss of S$900 million from trading in oil derivatives.

Market questions China Aviation Oil's huge losses
Analysts have reacted with shock to the announcement by China Aviation Oil (CAO) that it had lost some S$907m from trading oil derivatives. The fiasco is now shaping up to be Singapore's second biggest trade-related corporate debacle, after the fall of Barings Bank in 1995... [A]nalysts said the company had possibly betted incorrectly on the movements in oil prices... The loss of S$907m from derivative trades means CAO is technically insolvent, since it has a net equity of just S$245m...

Playing with derivatives is like playing with fire. Companies -- and individuals as well -- who are not careful in playing with them are likely to find themselves getting burned.

US economy holds up amid global slowdown

The latest economic news shows that while the US economy remains relatively resilient, the rest of the world economy is vulnerable. Excerpts:

Consumer Spending Stronger Than Expected
U.S. consumer spending rose a sharper-than-expected 0.7 percent in October, showing the economy off to a solid fourth-quarter start despite a step-up in inflation, a government report showed on Wednesday.

[I]ncomes rose 0.6 percent in October, the biggest increase since May and well ahead of September's 0.2 percent increase, the Commerce Department report showed... Adjusted for inflation, personal spending climbed a smaller 0.3 percent, a slowdown from September's 0.5 percent advance... Real disposable income -- what's left after adjusting for inflation and taxes -- rose 0.2 percent as food and energy prices rose sharply.

The department's price index for consumer spending...shot up 0.4 percent, the biggest rise since May. But excluding volatile food and energy prices, the inflation index ticked up just 0.1 percent, holding the year-on-year reading at 1.5 percent...

In a separate report released earlier on Wednesday, the Mortgage Bankers Association said applications for U.S. home mortgages, including loan refinancings, fell last week as mortgage rates edged higher.

Factory Growth Picks Up Speed in November
The Institute for Supply Management said its index of national manufacturing activity climbed to 57.8 from 56.8 in October, surpassing forecasts for a smaller gain to 57.0... The survey's employment measure grew to 57.6 from 54.8... ISM's prices paid gauge dipped to 74.0 from 78.5, while new orders expanded to 61.5 from 58.3.

Business Roundtable Releases December CEO Economic Outlook Survey
Business Roundtable’s December 2004 CEO Economic Outlook Survey shows that America’s leading CEOs expect the U.S. economy to continue to grow at a healthy pace in the first half of 2005, with a slight easing from the strong growth of 2004. The responses led to a CEO Economic Outlook Index of 98.9, the second-highest index level for the survey.

ECB Rates Seen Steady as Euro, Oil Weigh
The European Central Bank is expected to keep interest rates steady at 2 percent on Thursday, with markets looking for any hint that the central bank's worries about growth have heightened.

Euro zone manufacturing output stagnated in November... [T]he strong euro has been eating away at euro zone business confidence. It was blamed for a drop in Germany's key Ifo index in November to its lowest level since September 2003 and for bringing growth in the November Eurozone Manufacturing Purchasing Manager's Index almost to a standstill... [T]he index fell to 50.4 in November from 52.4 in October...

Nov global PMI shows manufacturing growth eased
Growth in the global manufacturing sector fell to its slowest pace in over a year in November, an indicator based on national surveys of manufacturers showed on Wednesday. The indicator, produced by JP Morgan together with research and supply management organisations, fell to 53.2 in November from 53.9 in October, recording its weakest growth since September 2003. The index combines survey data from around 20 countries including the United States, Japan, Germany, France and Britain.

Global Chip Gear Sales Seen Down 5.15 Pct in 2005
Global chip equipment sales are expected to fall 5.15 percent in 2005, an industry group said on Wednesday in a sharp reversal from its July forecast of growth of 23.98 percent. Sales of equipment used to make and test microchips are likely to total $33.49 billion next year, down from an estimate for sales in 2004 of $35.31 billion, up 59.13 percent, Semiconductor Equipment and Materials International (SEMI) said.

Among other things, the SEMI figures show how forecasts can change quite dramatically. Unfortunately, it seems to me that revision risks at the moment are mostly towards the downside.

Year-end rally faces slowing world economy

The US Commerce Department has revised third quarter real GDP growth to an annual rate of 3.9 percent, up from 3.7 percent previously reported. Second quarter real GDP growth was 3.3 percent.

In another release yesterday, the Conference Board reported that its consumer confidence index declined to 90.5 in November from 92.9 in October. The Expectations Index declined to 87.4 from 92.2 while the Present Situation Index edged up to 95.2 from 94.0.

Another piece of bad news yesterday: Japan's industrial output fell 1.6 percent in October. And it may not get much better in the near future. Based on a survey of manufacturers, Japan's Ministry of Economy, Trade and Industry forecasts that industrial output would rise 3.7 percent in November but drop 2.2 percent in December

Based on these, I see no reason to change the view I expressed in "Slowing world economy poses risk to stocks" that the trend in world economic growth is down. The end of the year may traditionally be a good place to be in stocks, but there are always exceptions, and contrarian plays are often a good bet, especially with such a well-known phenomenon as the year-end rally. Asian stocks, though, may be more resilient based on liquidity considerations.