Fannie & Freddie’s Conservatorship’s Possible Implications To Asia

``The US doesn’t just need US government money to support the US housing market: It needs money from foreign governments as well. And no one more than China. China’s central bank borrows RMB from the state banks (whether by selling sterilization bills or by hiking the reserve requirement) and then uses those funds to buy large quantities of Agencies. The flow of Chinese savings into the US housing market is entirely a government flow.”-Brad Setser, Council of Foreign Relations. So true … 

It’s nothing new from what we have been saying all along or from what we have been saying earlier.

The problem of the US deleveraging isn’t likely the same problem of Asia. Although much of the world’s tightened financial and economic linkages has unduly put to a strain on Asia’s financial markets. Aside from the slowdown in most of the OECD economies, which has likewise added to some pressures on the economic front.

Asia’s exposure to toxic papers remains modest as shown in figure 5.

Figure 5: IMF: Asia’s Exposure To Toxic Papers and External Debt

Next to the low exposure of Asian banks (as measured in % of equity) to toxic papers, the structure of external debt has been mostly long term except for Hong Kong, Singapore and Taiwan, which means financing woes have not been much of a significant concern.

 

Although we recently featured Korea as one of the apparent victims of the Fannie and Freddie’s where a foreign broker claimed the return of a currency crisis and a potential meltdown of Asia in Sequel To Asian Financial Crisis?, Costly Bailouts and Bernanke Buys Time, Figure 6 seem to dispel such concern.

Figure 6 IMF: Credit and Money Growth in Indonesia (left) and South Korea (right)

 

In short, much of the credit crunch in the OECD economies could have translated to a meaningful slowdown of liquidity growth in Asia, but this isn’t happening yet.

 

Broad money growth remains robust in South Korea (red) as shown in the right pane amidst a negative real interest rate (blue). In fact, money supply gained 13.2% last July (eastday.com). Yes, following the F&F takeover, Korea’s Kospi recovered by 5.24% while the won bounced from the streak of losses up 1.6%.

 

Meanwhile despite the 10% plunge in Indonesia’s JKSE index last week which had been linked to a sharp downturn in commodity prices. Credit growth seems to remain robust (left pane) courtesy of the IMF.

 

Funny how many of experts dug deep into the investing public’s psyche peddling the myth of how high “inflation” have caused the recent market rout. In terms of Indonesia, now that falling oil and commodity prices should equate to lower “inflation”, the rally in its market which should have happened seemed to have vanished altogether opposite the justifications by mainstream analysts.

 

Considering the dearth or selectivity of global liquidity much of the risk dynamics becomes more of micro than macro.

 

In the same way, these experts created the impression that the cutting of interest rates by the Bernanke’s Federal Reserves would lead to a rally global markets late 2007. It never happened.

 

In the same plane, local experts bruited about how remittances drove the Peso stronger. Where remittances remain at record levels, yet Peso has gone bust.

 

True, we can’t be wildly bullish on Asia because of the prevailing climate of uncertainty across the pond, but we should view this slack as an opportunity to accumulate than as an opportunity to run!

 

We believe that most of the selling that had accrued in Asia had been due to the ongoing deleveraging process (which includes unwinding of pair trades of the US dollar-commodity, momentum driven, aside from covert government support on the US dollar) which has importantly been the key link to most of the infirmities in Asian markets as shown in Figure 7.

Figure 7: US Global Investors: Declining Trend of Foreign Outflows

 

It is funny too how analysts screaming for us to run for the hills would use different data time frame references to prove or support their views. This cognitive bias is called “framing”.

 

Last August, we pointed out in Phisix: Knocking At The Exit Gates of the Bear Market! that 80% of the money which came into Asia in 2007 had been redeemed. Last week’s panic stricken analyst alluded to the size of foreign inflows from 2001 as a measure to portray a potential stampede amidst the gloomy outlook.

 

Well good enough, a chart provided by US Global Investors gives us a balance perspective. It reveals of almost the same pattern as we had been seeing in the Phisix: declining trend of foreign outflows!

 

According to US Global Investors, ``Net foreign selling in the emerging Asian markets since mid-2007 has exceeded more than half of the investment inflows seen in the 2003-2007 bull market. Capitulation among investors in the region might signal a rebound in stocks ahead.” (highlight mine)

 

Moreover, the recent actuation from the US government appears to give some light to Asian equities. This from the New York Times,

 

``But the takeover of the companies also reinforced concerns about troubles of the American economy and highlighted its significant reliance on foreign investors, particularly in Asia.”

 

If US policy actions had indeed been directed at Asia as caviled by some, then it is a blatant admission of dependence on Asian capital for the survival of the US dollar standard system.

 

Moreover, it also shows how much political capital Asia has generated enough exert influence on US policymaking to favorably act on its interests as in the case of F&F.

 

With the writing on the wall, how could one be bearish on Asia unless for short sighted reasons?

 

Finally I’d like to share this quote from Director of Research Robert J. Horrocks, PhD of Matthews International Capital (emphasis mine),

 

``The recent moves by the Treasury may help the process by which Asia reflates relative to the U.S., and this environment may be helpful for Asian financial stocks. They have been seen for too long as carrying the same kinds of credit risks as the Western banks, and Asian financial stocks suffered as their counterparts in the U.S. fell. Moves to reduce risk in the U.S. and global financial systems seem likely to favor Asian banks, which have clean balance sheets and strong underlying economies. Reducing risk in the U.S. debt market may also take pressure off regional currencies as investors worried that much of the official foreign exchange reserves were held in Fannie and Freddie debt.”

 

Now with the “inflation” scare and the “Fannie and Freddie” woes off the hook, would Asia find its legs and commence on a gradual recovery?

 

We’ll soon find out.