The Conrad Group

Bread & Circuses and a Global Rally in the Fourth Quarter

On March 17th we produced our global forecast for 2008 in which we highlighted unprecedented intervention by the Federal government in the credit markets and consumer markets. We also predicted that as it was an election year the intervention was far from over. The Romans used to say “Give them Bread and Circuses” noting the Roman citizens penchant for both. Today that approach has been replaced by stimulus checks, mortgage bailouts and public largesse! The numbers are impressive:

  • $168 Billion dollar stimulus package approved by Congress which will begin impacting the economy during the summer summer
  • An unprecedented reduction of interest rates by the Fed which will begin impacting the economy in the fourth quarter
  • Intervention in the credit markets by the Fed with a $200 Billion dollar credit line
  • Intervention by the Fed to salvage a leading financial institution

A $300 billion mortgage rescue package that is expected to become law in the coming weeks
And most likely a infrastructure stimulus spending bill that will be approved by congress after summer recess

Has our view of the fourth quarter changed? Not by a long-shot. Remember perception drives reality and the fourth quarter will be all about perception! What to expect:

  • A sustained dollar rally in Q4 driven by an interest rate hike by the Fed, positive economic news and most importantly expectations of a new Presidential administration
  • A dramatic correction in crude oil in Q4 to a level of $77 to $82 per barrel driven by a dollar rally and the perception that the new administration will radically reduce the United States carbon footprint. We are already beginning to see the speculative bubble begin to bulge.
  • A sustained rally in the US equity markets in Q4 driven by all of the above

And what about the rest of the world specifically the big emerging markets of India, China and Brazil. The big story in 2008 will be China with unprecedented capital inflows and an economy that is overheating Chinese inflation continues to mount exceeding 8% this month. Attempts by the Chinese central bank to cool the economy and tame inflation by raising interest rates and dramatically increasing reserve requirements have failed. So what’s the answer? The sustained appreciation of the Chinese Yuan which we expect will appreciate 5% against the Euro in 2008. The appreciation of the Chinese currency will have a profound effect on the Chinese economy forcing the government to begin focusing on expanding domestic consumption as a driver for economic growth as opposed to exports. The appreciation of the Yuan will also have a significant impact on the two other big emerging markets;

India; the Indian economy which has been buffeted by inflationary pressure driven by high oil prices and a significant correction in the equity markets will experience an economic and concurrent capital markets rally in the fourth quarter driven by lower oil prices, positive perceptions in the US, and a nuclear fuel deal.
As such we expect Indian exports to accelerate later this year and a drop in the price of crude oil will further strengthen the Indian economy. We forecast a GDP of 8.6% for 2008 increasing to 9.4% in 2009 with a rally in the Indian equity markets in Q4 of 2008. Two other factors will continue to have a positive impact on the Indian economy. The first is the growth of the ‘New Consumer’, within 15 years India will have a middle-class that exceeds 350 million people which is larger than the entire population of the United States and will equate to unprecedented buying power. The second is infrastructure investment which will exceed $1 trillion dollars in PPP terms during the next five years. The modernization of India’s infrastructure will have a profound impact on the Indian economy as transport costs decline and the speed and efficiency of transport increases.

Brazil; is already becoming the world’s bread basket and ever increasing demand for commodities from the ‘New Consumers’ of China and India will continue to drive Brazil’s exports and the prices for commodities like soy to record levels. Additionally we believe that the appreciation of the Chinese Yuan will dramatically increase trade flows of commodities to China. Brazil is also benefiting from the ‘New Consumer’ within 10 years Brazil will have a middle-class that exceeds 80 million people. This is significantly larger than the entire population of Canada and will equate to significant buying power. Luxury retail has already taken off in Brazil with a continued build-out of high end malls and fashion boutiques. Brazil is now the 7th largest cosmetics market in the world and the demand for all types of consumer goods is expected to increase as the economy continues to grow.

We have coined the real story going forward as “The Next Wave”. An event that is now occurring in the new economies of Brazil, China and India and a number of other emerging markets which can be defined as a convergence between the new consumer, technology, infrastructure, and environment that is unprecedented in human history. In the next 20 years more new consumers will be created than were created in the last 2000 years. Investments in Infrastructure in these markets during the next ten years will exceed those of the entire post war reconstruction of Europe and advances in technology will drive an ever increasing pace of innovation at diverse global centers of excellence. Underlying all of these trends will be the environment which will drive the creation of a wide range of new industries and opportunities. Examples of “Next Wave” industries include; Environmental Services, Renewable Energy, Private Education, Private Healthcare, Media & Entertainment, Distribution & Logistics and Hospitality and Tourism. All of these verticals will benefit by a gap between supply and demand that will not be closed for the next 10-15 years. The reasons are simple within the next 20 years more than 500 million new consumers will be created and these new consumers will demand clean water, clean air, quality education, quality healthcare and the other benefits that rising incomes provide. This will create an unprecedented array of opportunities for investors in these markets going forward.

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