Friday, November 30, 2007

[Greed & Fear] The bizarre nature of America’s GSEs and the coming Asian bubble

From FT Alphaville:

The saga of the big US, government-sponsored mortgage lenders has fired up CLSA’s Christopher Wood this week. In the latest issue of his client newsletter Greed & Fear, Wood muses over the recent “spectacular” declines in the share prices of Fannie Mae and Freddie Mac (latest news in the FT, here and here).

The federal mortgage agencies are a “bizarre mix of private- and public-sector incentives”, says Wood. “They have long borrowed money with an implicit federal government guarantee which investors tend to assume have made their bonds the equivalent of higher yielding Treasury bonds”....

...And in his romp around the world, Wood alights on the bond market, where he describes action as “scarily deflationary”. This makes Wood even more wary of cyclicals geared to external demand in the context of an Asian-equity portfolio. It is also the case that where domestic cyclicals are owned, the place to own them in his view is primarily in India.

It remains a reality that Asia as an asset class is cyclical by nature, notes Wood.

There will clearly be collateral damage in Asian markets if the American slowdown isas severe as suggested by the recent US bond-market rally. But the key long-term point to remember is that Asia and emerging markets will be the next bubble to form globally from the current Fed-easing cycle, which has much further to run. It would seem that 2 per cent is a good place to start for where the fed funds rate is ultimately going to end up in this easing cycle.

In the same series, Buy gold, avoid 'structured excreta'