First, Goldman is cutting back on exposure to Asia, Eastern Europe and Latin America. And they *are* the smartest guys in the room. These are more near term calls, but they sort of coincide with my views in that these are going to great long term booms, but once perception changes from "growth to the sky every quarter from here to infinity" to "a great long term story but potentially slowing from hyper growth GDP rates to just darn good GDP rates" will certainly effect perception. (I did close out my position in iShares Hong Kong (EWH), held since August, yesterday). Much like tech stocks which were the safe haven (up until the implosion post Cisco) now people are talking about these countries as safe havens. Really? 2 communist countries, one with authoritarian leadership? Superior growers for the next decade? Yes. Taking advantage of the global commodity boon? Yes. Safe havens? Not so much. Not after the huge gains and not with everyone assuming "just invest in China until Olympics, you cannot go wrong".
- Goldman Sachs has begun to cut exposure to emerging markets, fearing that turmoil in the global credit markets risks triggering a "painful" correction in the high-flying assets of Latin America, Eastern Europe and parts of Asia.
- In a series of client notes over recent days, the US investment bank has advised cashing in profits as a precautionary "near-term" measure. The MSCI emerging markets index has risen 28pc since the credit crunch in mid-August.
- The warnings are likely to raise eyebrows in banking circles since Goldman Sachs has led the charge into the frontier economies, coining the terms "BRICS" to describe the quartet of Brazil, Russia, India and China.
- The bank has closed its positions on Brazilian and Mexican stocks after reaping fat rewards in the latest rally, hoping to buy back later. "We see ongoing vulnerability. As the August pullbacks showed, the market could easily begin to worry more about the transmission of the latest financial problems to US and global growth. While contamination to emerging market equities in that episode proved short-lived, it was painful. We think it is prudent to book a gain," it said.
- A growing number of analysts fear that emerging markets have succumbed to a dangerous bubble, replacing US property and structured credit as the new locus of systemic risk. Credit rating agency Standard & Poor's warned investors last week to cut the portfolio share of emerging markets from 6pc to 4pc.
- Goldman said it remained "very bullish" on the emerging markets for the longer run but added that investors need to pick and choose at this stage. Much of Eastern and Central Europe was at risk from overheating, with hot money flows now plugging huge current account deficits - 11.3pc in Romania, 17pc in Estonia, and 25pc in Latvia.
- Inflation has surged back above the Bank of England's 2pc target for the first time since June, in the latest sign that rising prices remain a threat to the economy. The Consumer Price Index (CPI) rose from 1.8pc to 2.1pc last month, according to the Office for National Statistics.
- The increase was greater than economists had anticipated, and was driven largely by higher petrol costs as well as the annual increase in school fees. Economists said the figures would severely undermine the likelihood of an interest rate cut before the end of the year.
- Food prices were also on the rise, with supermarkets reporting an increase in meat prices, along with the cost of fruit including strawberries and bananas. However, Howard Archer, chief UK economist for Global Insight, said there was also some more reassuring news. He pointed out that so-called core inflation, which strips out the more volatile parts of the index, dropped to a low for 2007 of 1.5pc.
- "This suggests that a number of retailers feel that they need to contain their prices in order to encourage increasingly pressurized consumers to spend," he said. (which makes profit margins go down, which makes the "E" in P/E ratio go down, which makes stocks go down - ok glad to hear it is not a problem)
- "October's rise in consumer price inflation does not completely rule out a December interest rate cut, but it is likely to add to the Bank of England's caution about an early move given that headline consumer price inflation likely to be pushed up further in the near term by higher energy and food prices."
- The headline Retail Prices Index inflation, which includes mortgage payments and the effect of house prices, increased from 3.9pc to 4.2pc during October. (but if you convert from pounds to pesos, err dollars you can cut that figure in half! ;) I knew that conversion rate would work out somehow in our favor) <--facetious comment
- Saudi Arabia's oil minister, Ali Al-Naimi, told the world that its dependence on crude will increase and that the race to develop alternative energies will not dim demand for fossil fuel. Speaking ahead of tomorrow's official start to the Opec oil producers' summit, Mr Al-Naimi mounted a strong "defence" of oil, criticising experts who say crude is in decline or that green energy is a viable alternative.
- But he warned that consuming nations – particularly in the West – should be under no illusion that more environmentally-friendly sources of power would reduce carbon emissions. "Let's be realistic about this," he said. "Take developing countries. They are growing at a very fast pace – 7-10pc or more a year. These countries are going to need energy, and fossil fuels will be the source.
- "Let's be realistic about this," he said. "Take developing countries. They are growing at a very fast pace – 7-10pc or more a year. These countries are going to need energy, and fossil fuels will be the source.
- But Mr Naimi argued that there was enough oil in the market, and blamed the recent price hikes on "multitude of factors" including speculative investors. He said: "Price is no reflection of the fundamentals. We don't like it when the high price hurts the economic growth of any country. (Hmm, but I am sure they are not complaining either, since it makes them that much richer as each barrel sells for an inflated price. Also I love the quote, price is not a reflection of the fundamentals. Really? I have to agree with this guy - I wonder if he has been investing in Chinese small caps or solar stocks of late. So you mean there are consequences when Uncle Al and now Uncle Ben flood the world with liquidity? Bubbles get pushed from one part of the globe to another? Fascinating ;) Well at least someone is getting rich off all this liquidity, somehow its not the Average Joe.... yet again. ) He said the price had been driven higher by "pessimists" and "agitators" who scare the market with talk of tight demand or oil supplies having peaked. "Any pessimism results in fluctuations of markets. The role of speculators has been a big factor," the minister said.
- Morgan Stanley has slashed limits for thousands of credit card customers, as the credit crunch continues to bite. Cardholders saw their borrowing limits cut by thousands of pounds last week, with immediate effect - but the card company now says that a quarter of the letters were sent out in error.
- Northern Foods said that it is ready to pass a 10pc hike in commodity prices on to its supermarket customers, which could knock sales. The food manufacturer and supplier which counts Tesco, Marks and Spencer and Asda among its customers, said that while it has agreed adjusted prices with supermarkets, it was not clear how that would affect shelf product prices, and in turn what impact that would have on sales volumes.
- It said that cereals, dairy, cocoa and fats had been particularly hit by price increases, caused by lack of supply, and that it was braced for rises between 8pc and 10pc in the full year.
- Chief executive Stefan Barden said: "The impact of these cost increases has been recovered for the second half through selling price increases to customers, although the extent to which customers pass these onto consumers and the resultant potential impact on future sales volumes remains unclear."
Sixth, or maybe Teun Draasima is the smartest guy in the room? FTSE Higher Despite Recession Fears
- There is a growing risk that the bull market of the last four years is coming to an end, according to Teun Draaisma, Morgan Stanley's contrarian chief European strategist. He believes it is increasingly likely that the credit crunch will lead to a US recession, with damaging global consequences.
- When stock markets were pushing new all-time highs in June, Mr Draaisma said his model was flagging up a triple sell signal. Then he turned bullish during the lows of August before predicting an impending "equity mania" last month.
- Now he says he has "serious doubts about the fundamental growth outlook due to the deepening ongoing financial crisis and the apparent reluctance of central banks to cut rates as inflationary risks still loom".
- British manufacturers are raising their prices at the fastest rate in 12 years, in a sign that inflation is threatening to bubble over into the wider economy. Factory gate inflation rose by a full percentage point last month to 3.8pc - the highest since December 1995, the Office for National Statistics said. The news undermines hopes that the Bank of England will soon start cutting interest rates from their current level of 5.75pc.
- Surging petrol and food prices are forcing businesses to pass on their extra costs to their customers. Retailers are likely to raise their own prices as a result in the coming months, experts believe.
- Food prices are increasing at the fastest rate since the summer of 1993, the ONS figures also show. They have risen by 6pc in the past year, while petrol prices increased by 2.4pc in October alone, as higher worldwide oil costs affected prices in forecourts and wholesalers in the UK.
- And in another sign of rising costs, it said input prices - a measure of raw goods prices - rose 8.5pc in the year to October, the fastest rate in more than a year.
Long just another fun day reading economic tea leaves....
