market folly

This one ought to get TraderMark over at Fundmymutualfund.com all riled up. He has been over there pounding the table with his coined phrase "world of shortages" as an investment thesis for some time now. Then, Jeff Rubin over at CIBC World Markets comes out with a slideshow entitled "The Age of Scarcity." Hat tip to Paul Kedrosky, author of Infectious Greed who originally posted the link to the slideshow.

There's 31 slides in all, but I wanted to post up a select few of slides that really illustrate some macro themes we are seeing.



First, we'll look at Global GDP Growth. As you can see from the chart above, Emerging Markets are clearly the leader as an overall % of global GDP growth. And, this comes as no surprise, as pretty much everyone not living in a cave already knew that. What I am more interested in is the percentage that Central & Eastern Europe is accruing. If they are truly benefitting from Russia's emergence, then you would expect their share of global GDP to increase in the coming years as well. After all, they have already surpassed Japan (but I guess that's not much to brag about is it?). For my money I really think Russia has the best risk/reward setup in terms of Emerging Markets.



Next, let's look at the slide above depicting other regions' dependency on the US Market. And, surprisingly enough, Europe, Latin America, and Asia are all less dependent on America than they were back in 2000. Obviously, the world has become a true global economy and nations have diversified their dependency, which is a good thing. Although I do not want to get into a coupling/de-coupling argument here, I do think it is worth noting that the overall trend the past seven years has been that other markets are less dependent on exporting to the US market. But, at the same time, it must be noted that Emerging Asia easily is the most dependent on the US out of the 3 regions. There has been increasing chatter about how the US slowdown could be affecting China, and that chatter is warranted. The US market represents 16% of their exports and we will have to carefully monitor this situation as numerous investment theses hinge on China's continued growth.



Thirdly, I want to stick with the China theme and glance at the Resource Demand Growth slide pictured above. As you can see, China consumes MANY more resources than we do, and they are seeing average annual resource demand growth of 30% for aluminum and 28% for nickel. This just goes to show that a) China is a hungry monster and b) they are a huge piece of the "age of scarcity" puzzle. Also, I just want to point out that this slide further reiterates my bullish stance on aluminum/Alcoa, as I mentioned here. Demand for these resources is unreal.



Lastly, I want to turn to the housing sector in the US. This slide above shows what we already know: the housing market sucks and prices are falling. What's interesting though is that so many people out there are calling for a '2nd half recovery,' yet they don't seem to realize that the housing market will STILL be in turmoil. In fact, it could very well be even worse by then considering that this summer another major wave of ARMs (Adjustable Rate Mortgages) are resetting back from their low teaser rates to sky-high interest rates. This reset window will obviously take a few months to truly affect the homeowner, as they soon discover their mortgage payments will increase substantially. And, as this plays out months down the road, these homeowners will face forclosure, guaranteeing the next leg down in the housing market. And, it will slap all those '2nd half recovery' pundits right in the face. Interestingly enough though, CIBC here predicts that housing prices and subprime mortgage delinquencies will in essence stabilize towards the beginning of '09. So, they seem to be calling for a early-mid '09 housing recovery cycle. What you cannot see from this chart though is prime mortgage delinquencies, which I anticipate will also see rising delinquencies as people who might have good credit were still baited into taking the teaser rate ARMs which will be resetting. So, while CIBC could theoretically be right in calling a stabilization of subprime delinquencies, you still have to take into account the various other types of mortgages (like prime) which will also undoubtedly see rising delinquencies due to the crazy mortgages people with various credit grades and people from all walks of life were signing up for.

Those are the main slides I wanted to highlight, as I felt they clearly depicted some macro themes we have been seeing and will continue to see. You can check out the entire CIBC World Markets "The Age of Scarcity" slideshow by Jeff Rubin and Avery Shenfeld here.