Before reading this, pour yourself a drink.
OK. Jim Walker, director of his independent research boutique Asianomics and former CLSA economist, says his outlook for the global economy is a double-dip, and he's not framing that as a hypothetical but as a likelihood.
The markets today resemble those of 2007, when global equities hit an all-time peak, oblivious to the carnage starting to take place in credit markets. Similarly, Walker takes no comfort in seeing equities retrace now, because they fail to predict problems. He has more faith in the power of credit markets to send signals.
The United States' key leading indicators do not yet signal recession, but they are deteriorating, and Walker is convinced they will worsen. This means liquidity will worsen and asset markets will struggle in 2011 and 2012.
True, the yield curve is not inverted (the classic warning of recession), but Walker says its power of prediction cannot work when short-term interest rates are at zero. Housing indicators, meanwhile, are looking bleak, while the corporate sector is bent on deleveraging, rather than investing.
"The game is up for governments and central banks," he says, as bond markets begin to revolt against deficits, tax hikes and printing money. Raising taxes just takes wealth out of the private sector, which means people won't spend, but save. Economic recoveries aren't the result of government spending, he argues; government spending can only buoy GDP numbers for a short while, until bond markets rebel.
The US has won itself a breather with Federal Reserve Bank chairman Ben Bernanke's vow to begin its 'exit strategy' from quantitative easing (ie printing money), which has calmed fears about inflation. But the sovereign debt crisis is far from over, and Walker is quick to compare Greece to US subprime real estate, at least in the sense that regulators were too ready to declare a crisis 'contained'.
The danger now is that, unlike in 2008, China is "boxed in" and will not be able to reprise its role as an engine of meaningful economic growth.
If anything, Walker is most bearish on China, rather than the struggling US or eurozone. He notes that its 2008 response to the global slowdown was the world's biggest stimulus package, which pumped the equivalent of 44% of 2008 GDP into the system in the form of money supply.
This is incredibly inflationary. Walker says inflation must be viewed in its pure form as credit, not as a basket of consumer prices, which he argues are only the symptoms of inflation. And on the basis of Chinese monetary supply, inflation has been massive. Nor has all of this inflating worked out as Beijing hoped, for much of it went to real estate and infrastructure instead of boosting global demand.
A replay of the mid-1990s boom-and-bust 'Itics', the international trust and investment corporations, is in store. In the late 1990s, the Itic busts led to soaring non-performing loan levels of up to 50% of bank assets. The banks were bailed out, but at the expense of consumption, as that money ultimately came out of workers' pockets. The risk today is that a similar clean-up from the 2009 spending boom will once again rely on taxation, which will crimp consumer demand.
Although it is true that Beijing is implementing measures to curtail speculative property deals in Beijing and Shanghai, this has only pushed stimulus liquidity to second- and third-tier cities, where the likelihood of new developments achieving commercial sustainability is less.
The real-estate bubble is also sucking away resources from the rest of the economy, which is why it's so hard now for manufacturers to find lots of cheap labour.
The massive year-on-year increase in gross fixed investment and building sales prices is fuelled by renminbi-denominated loans. "If this were America, you'd be told you should sell the dollar," Walker notes. But because it's China, where the leadership is reputedly so brilliant, no one worries. "But China's debasing its currency faster than anyone else," he says.
Walker made his remarks last week at AsianInvestor's Korea International Investment Summit. Unfortunately he spoke well in advance of cocktail hour.