Footnote 2011: Being cautiously optimistic was right

In January, I wrote my prognosis for 2011. The title was “Cautiously Optimistic Into 2011″. I intend to write another post like this early in 2012 with asset allocation and market calls for the new newsletter. But right now I just want to review the basic outlook I presented.

I had seven major conclusions. Here’s what I said and how well it has stacked up

Chart of the Day: China’s Financial Architecture

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? That is our homework assignment over the holiday. Getting it right will determine 2012′s investment and trading returns, in our opinion. We leave you with an excellent flowchart and table from the IMF explaining China’s financial architecture

Thoughts on Europe and the global synchronised slowdown

We are in a second synchronised global growth slowdown. Moreover, the policy response must be more muted this go round as the public sector is more indebted and has less policy space than in 2008 or 2009. Expect policy inaction followed by fits of volatility due to inaction. This points to a risk off a lot more than a risk on environment

Full Text: Moody’s revises rating outlook for Australian mortgage insurers to negative

Below is the press release issued by Moody’s in conjunction with the down grade of Australia’s mortgage insurers

The 2012 Blind Side: China’s Housing Bust

Foreign Affairs has just posted a must read piece, “China’s Real Estate Bubble May Have Just Popped”, which will sound very familiar to Global Macro Monitor readers. We’re going to be spend a lot time over the holidays thinking how this plays out in China’s financial sector and the implications for markets

Is Finland Really A Closet Member Of The Eurozone Periphery?

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

Market Facing Strong Headwinds

All in all, the negative fallout from the EU sovereign debt crisis and the outlook for the U.S. economy are likely to have a strong downward pull on the stock market. Rather than reflecting fear, the market seems unusually complacent as investors are overconfident that the world financial authorities can pull a rabbit out of the hat at the last minute.

Full text: Moody’s reviews five Spanish covered bond programmes for downgrade

The following is the press release Moody’s issued in putting the covered bonds of five Spanish banks on review for credit ratings downgrades

The Collapse of Construction Employment

Here’s a great chart from the BLS showing the collapse of construction employment from May 2006-10. No surprise the largest declines are in the four housing bubble states — Nevada, Arizona, Florida, and California. Stunning employment in this sector is down 40-55 percent and one reason why the traditional monetary transmission mechanism is broken — lower rates sparks construction spending and thus hiring of construction workers

House Prices Plunge in Chinese Ghost City

Could this be part of the reason the Shanghai was the only major index we track that was down last week

How do we know that China is overinvesting?

For years I have been arguing that the Achilles heel of the Chinese growth model is the unsustainable rise in debt that comes as a necessary consequence of capital misallocation fueled by bank lending. Capital misallocation, I argued, was the nearly inevitable consequence of high investment growth over many years in a system in which price signals are severely distorted and there is political incentive to maximize economic activity in the near term. If capital misallocation is funded by debt, the increase in debt is necessarily unsustainable

News Links: Draghi – If fiscal policy becomes hawkish, monetary policy will be dovish

News links from 2 December 2011 include links on the European sovereign debt crisis, the UK economy, the latest on mortgages and technology as well as other stories.