Tags: Gayed | China | World | Deflation

Gayed: China Can Save the World from Deflation

By    |   Monday, 03 Mar 2014 08:15 PM

China has the power to save the world from the deathtrap of deflation, argues Michael A. Gayed, chief investment strategist and co-portfolio manager at Pension Partners, an investment adviser.

Deflationary pressures remain surprisingly strong despite years of central banks pumping trillions of dollars into the financial system. If deflation takes hold, the results could be disastrous for developed economies. Existing debt would become increasingly burdensome in a relentless self-fulfilling cycle as people expect continually falling prices.

Central bankers would be almost powerless to respond. That's why they fear deflation and keep repeating the word "accommodative" at ever turn, Gayed writes in an article for MarketWatch. "But accommodative policy has not been enough," he declares.

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However, industrial commodities that are performing well and rising in price can reverse deflation. That's where China comes in.

Rising commodity prices created inflationary pressures while China focused on investment instead of consumption. Now the second-largest economy has slowed investment and is focusing on consumption. China observers say the commodities super-cycle is over.

"However, just because there is no more super cycle does not mean that there is no cycle," Gayed says. "Any kind of pickup in China sentiment likely means a pickup in commodities, and a pickup in cost push inflation."

The price ratio of the iShares FTSE China Index Fund relative to the iShares MSCI All Country World Index has been sliding, showing China's long and pronounced bear market relative to the rest of the world.

"With valuations at crisis levels for many emerging markets, sentiment terrible, and the belief that buy and hold is only applicable to U.S. equities, the setup is there for a very strong reversal in the above trend," Gayed observes. "This is exactly what may be needed."

If China's markets revive, commodities will rally and bring back their inflationary pressures.

"To break a secular trend in deflation, which would be wildly devastating over time, China strength can save the world," he predicts, adding that wage reflation must eventually also return.

The Telegraph columnist Ambrose Evans-Pitchard sees China as more of a danger to the world economy than a savior.

Chinese leaders are moving to pop the country's credit bubble before it gets worse. "This may be well-advised for China, but the rest of the world seems remarkably nonchalant over the implications," he writes.

Some experts warn that slow deflation may lead to a hard landing, sending deflationary pressures through out the world, he says.

"What is clear is that we are dealing with a credit expansion of unprecedented scale, equal in size to the US and Japanese banking systems combined."

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China has the power to save the world from the deathtrap of deflation, argues Michael A. Gayed, chief investment strategist and co-portfolio manager at Pension Partners, an investment adviser.
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2014-15-03
Monday, 03 Mar 2014 08:15 PM
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