MoneyNews
Friday, July 1, 2005

1. Wilkinson's Edge: Don't Buy Into the Asian Shell Game

India's GDP growth slowed in the last quarter, but beware – the southern Asian nation hides behind a deceptive veil …

At MoneyNews, we keep a focused eye on the financial journals, scanning for hot new topics, searching for those shreds of evidence that help us keep a balanced perspective.

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Lately, the frenzied debate has been about whether the global economy is slowing or not.

To start the year, we heard Chinese officials declare that their economy was too hot and needed to be slowed down.

That forced a global reevaluation of commodity prices, ushering in some degree of economic cooling -- and all this has bolstered the view that interest rates around the world are set to fall.

Recently, the Federal Reserve just commemorated its anniversary of monetary tightening by announcing its tenth interest rate hike – to 3.25%.

And at the same time, crude oil prices have reached a new record high, hitting almost $61 per barrel.

Perhaps the Chinese move was merely a ruse to blow some of the froth off the feverish pace of its industries and undermine both commodity and corporate asset prices.

First, China consumes enormous quantities of agricultural products and raw materials – both of which had reached multi-year highs just as it was consuming as much as it could get its hands on.

Second, China is now on a global brand-buying spree. So why force equity prices against them when they could engineer the illusion of a cooling economy?

While China may be sniggering at its success in fooling the rest of the world, the country's growth continues to build at a rate of over 9%.

Meanwhile, just around the global corner sits China's partner in crime, India. That country has just announced a reduction in its growth rate from 8.5 to 7%.

Is this another sign of global a slowdown – or just another veil?

This is the key point: As we have tried to hammer home lately, high energy prices are merely the tip of the iceberg. Global demand remains intact because these two new entrants (India and China) have muscled in on the world's oil supply.

That said, let's look at Indian growth.

On the one hand, growth from January to March 2005 slowed down – but that masks a meteoric rise. Economic growth in India (which is the world's second most populous nation) has skyrocketed by 58% since 1997.

India's economic slowdown in this latest period is entirely due to a major decline in agricultural output. The fact that agriculture accounts for 22% of overall output means that fluctuations cause considerable shifts in the overall economy.

In fact, had agricultural output seen the same development it did in the previous period, the overall level of growth would have been maintained at roughly 8.5%.

The monsoon season starting in June will deliver 80% of annual rainfall, giving farmers hope that recently sown crops will be successful.

However, since 1997 the economy has become less dependent on farm output with its share of GDP falling by 6%.

But to understand where the phenomenal rate of growth has come from, we must look at two areas – trade and the service sector.

While the value of agricultural produce is 13% higher than in 1997, the real growth spurt stems from a 50% gain in manufacturing, a 78% increase in the value of services and a 100% rise in trade. So as India flexes its production muscle, it sucks in more raw materials with which it can build manufactured products.

Output in services remained unchanged, growing at a rate of more than 5% during the year, while trade expanded at an 11% rate – also similar to last year.

But of most interest is the surge in manufacturing output, which saw its growth rate improve by half to a 9.2% pace.

So if anyone tries to tell you that global growth is slowing down, you can tell them to take another look between the cracks, where we find plenty of evidence to show that it really isn't.

Traders on the Bombay Stock Exchange certainly don't anticipate a slowdown – as stocks in that market have maintained their bull run.

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2. Housing Wealth Fuels Mania Buying

Every fashion or trend begins with a small circle of people.

And once a brilliant innovation picks up steam, more and more people start to jump onboard – and before you know it, the entire herd wants a piece.

This concept certainly applies to the express train that is the housing market. Compelling new evidence illustrates that real estate is hitting full speed. But what will come next?

In 2001 just over 5% of mortgages were approved for investment home purchases. But last year the number of investment mortgages accounted for over 8.5% of all approved mortgages, while in the first four months of 2005 that number is pushing 10%, according to data from First American Mortgages, which tracks 46 million mortgages monthly.

Of course if a mortgage is taken out specifically to provide rental income, it won't be included in this data. That means that investor activity is likely to be understated.

Meanwhile mortgages used specifically to purchase second homes have also risen dramatically from 2.2% in 2001 to 6.1% in 2004. The latest data from LoanPerformance says that so far in 2005 the rate has increased to 7.2%.

The National Association of Realtors (NAR) reported the second-highest level of sales on record in May. This comes in the wake of the Federal Reserve recently commenting on "signs of froth in some local markets."

Now we see a trend.

Clearly, speculation is on the rise and stoking the engine, making investors the marginal beneficiaries of the surging market. But it also leaves them vulnerable to a topping out of the market.

The NAR recently revealed data suggesting that through March this year, 23% of homes purchased were for investment, while an additional 13% were vacation properties.

This analysis is broader in scope than the LoanPerformance study, as it includes cash-driven and equity-financed home purchases.

The NAR says that Baby Boomers flush with spectacular gains from their primary residences are stacking up that cash to take on second homes – and that leaves the entire market vulnerable to price softening.

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• These Sectors Will Flourish With Interest Rate Hikes – Learn More
• The Government Is Perpetuating 'The Inflation Lie' – Learn More