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Monday, December 17, 2007

Asia Tanks

Stagflation May Return as Price, Credit Risks Meet (Update1): “The world economy is facing the risk of both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.

The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy “close to stall speed,” according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

“What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,” says Joachim Fels, co-chief global economist at Morgan Stanley in London.”

PPI and CPI did surprise to the upside last week… How permanent is this inflation threat as the credit crunch worsens? Nobody knows for sure. It depends entirely on what kind of action the world’s central banks will take in an attempt to ‘kick starts’ the credit markets again.

Emerging Markets Will Be `Truly Tested,' Deutsche Bank Says: “Emerging-market economies will be ``truly tested'' next year amid a slowdown in U.S. growth, declining commodity prices and growing investor risk aversion, Deutsche Bank AG said.

Developing nations will keep facing “near-term financial risk caused by the liquidity and credit crunch,” Deutsche said in a report today. A recession in the U.S., the biggest buyer of emerging-market countries' exports, “cannot be ruled out,” Deutsche said.

Emerging-market nations in recent years have used the windfall from high commodity prices to cut dollar debt and boost foreign reserves, allowing them to weather the global credit market rout this year. Developing-nation debt posted gains even as widening losses from subprime-mortgage investments provoked aversion to higher-yielding assets. Emerging-market bonds denominated in local currencies have returned almost 20 percent this year, according to Deutsche.

“Many observers of emerging markets (ourselves included) have argued for the past several years that EM has changed, that it no longer is the same asset class that suffered multiple crises during the 1980s, 1990s and the early part of this decade,” Deutsche said. “2008 could well be the year in which the perceived resilience of emerging markets is truly tested.””

See my recent post The Global’ Decoupling Theory’ is Garbage.

Wall Street Sees 20% M&A Slump on Scarce LBO Credit (Update1): “Even Goldman Sachs Group Inc., the world's leading takeover adviser since 2001, is prepared for a decline in mergers and acquisitions income next year when a slowing economy reduces the market for leveraged buyouts.

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate. That may reduce fees on Wall Street and contribute to Goldman's first profit drop since 2002, the last year M&A decreased, according to analysts surveyed by Bloomberg.

LBO firms, responsible for half of this year's 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years. The pace of takeovers fell 33 percent since the end of the second quarter as chief executive officers at companies, including Virgin Media Inc. and Cadbury Schweppes Plc, delayed asset sales amid signs economic growth in countries ranging from the U.S. to Britain is ebbing.

“It's the end of an era for a while for the very large LBOs,” said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland's biggest bank.”

Yup. The LBO premium definitely has to come out of equities. All potential buyout targets are going to massively under perform as the hedgies figure this out and liquidate.