The Optimism of a Pessimist

The Optimism of a Pessimist - at www.moneyweek.com - the best of the international financial media

A lot of people are upset with me these days. For the past several years, I have been rather vocal in stressing the mounting risks of an unbalanced world. With that stance comes the inevitable label of the pessimist -- the doomsayer who is increasingly expected to say something bad about everything. When I don't do that -- as exemplified by my recent bullishness on bonds and my more constructive views on Europe -- the response has bordered on shock. Other pessimists feel as if I have turned on them in an almost "treasonous" fashion. Such are the perils of labels. No one -- neither an optimist nor a pessimist -- should be painted with one brush.

My newfound optimism on the bond market is a case a point. My call on US interest rates has long been framed in the context of a classic current account adjustment -- a shift from deficit back toward balance that, for most nations, is invariably accompanied by the combination of a weaker currency and higher real interest rates. I still believe such an endgame eventually awaits the United States -- leaving me an unrepentant bond bear. But I now expect something else to happen first -- namely, a China slowdown brought about by a marked deceleration of growth in its fixed investment and export sectors. With these two sectors collectively accounting for 80% of Chinese GDP and currently growing at a 30% y-o-y rate, a China slowdown arises from the confluence of internal policies aimed at the excesses of China's property bubble and external protectionist pressures taking dead aim on Chinese exports. If I'm right, this will lead to a deceleration of pan-Asian GDP growth and a sharp fall-off in commodity prices -- both bond-bullish developments.

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