Walker further adds that partial unwinding of the Yen Carry Trade comes close after the G7 meeting. He feels that central banks are happy to see the unwinding of the Yen Carry Trade and they will support carry trade unwinding.
He adds that Yen Carry Trade has been distorting real economies. Walker believes that there could be an interest rate cut in US only if there is a recession.
According to him, commodity prices have been rising on the back of strong growth in India and China.
Excerpts from CNBC-TV18's exclusive interview with Jim Walker:
You have been talking about this scenario for a while now? What are we going through in the global markets? Do you think it will get worse?
I fear it will get worse before it gets better. I think we are in the early stages of global markets beginning to realise that risk appetite is taking a turn for the worse and the global economy is going to slow down during the course of this year.
So equity markets are beginning to place those risks; the risk of slow down and risk of capital returning home and staying here and the increasing preference for cash rather than equities all of which, is going to affect us for the next two to three months at least, if not for the next year or so.
Where is the crux of the problem? Is it the concerns on the US economy and do you think concerns that we might be looking at a recession-like scenario should be taken on board?
I think the US is the centre of the problem and has been so, for all the growing problems, for the last four years. The growing problems have just been extremely easing monetary policy, which has then gone into the US real economy through the housing market; we have seen a major housing bubble in the US what we would call mal-investment in the US housing market - far too many stocks on housing, too much lending and borrowing in the mortgage market and we are beginning to see although that unravel in a nasty way.
I just don't believe that the sub-prime mortgage problems are going to be confined to sub-prime mortgages. It is like saying that the Taiwan problem in 1997 was going to be confined to Taiwan, the TMT problem in 2000 was going to be contained to TMT; these things are never contained and are always contingent. I think that is going to start running through the rest of the credit system, which is going to give us a very weak US economy over the course of 2007.
Problems in earnings prospects for US companies, problems in demand prospects for Asian countries but of course the exception for India because India is not export dependent but those problems will begin to reflect themselves in equity valuations and I think that process has started.
What is your take on when this whole Yen Carry Trade business will end, because we have seen little bit of pain this week on account of that. Do you expect to see more and more strength on the Yen?
The partial unwinding so far of the Yen Carry Trade is extremely interesting, because it comes not long after that G7 meeting. Of course, at G7 there was no communication suggesting that there was going to be consorted action to strengthen the Yen despite the fact that it and the Japanese policy had been identified as being problematic just in terms of how much money was spilling over into other markets and assets.
I think behind the scenes, the Central Banks in the world are happy to see the unwinding of the Yen Carry Trade and if possible if they see Yen strengthening. They are going to lean with that wind and push it stronger, so that the carry trade, if not quite exterminated, is certainly reduced substantially because what the Central Banks are belatedly realising that the Yen Carry Trade in association with all other easing money around the world has been distorting asset places and increasingly distorting real economies.
The process is now underway to unwind that; whether it is particularly orderly for equity markets and for some other assets, I don't think the Central banks really care at the moment. Unless there is a real problem in the credit system, they will do nothing to stop it and probably everything to encourage it. So I think a lot for yet to go in the Yen.
And would you say that the chances of rate cut by any Central Bank across the globe are slim at this point?
People are looking at the US in particular as a source of reducing interest rates. Mr. Bernanke, the Fed Chairman was talking about inflationary affects of globalisation; we have never had this kind of commentary before. He was really talking about the fact that commodity prices had been rising at the back of strong growth in places like India and China and that was now feeding back into inflationary pressures in the US.
That did not sound like a Fed Chairman was about to cut interest rates to me but I believe that later in the year we will see US interest rate cuts, that is going to be on the back of a recession in the US economy. That is the only way you will see an interest rate cuts around the globe this year, much weaker economic growth and that is as bad as interest rates rising if not slightly worse.
A lot of people are comparing, what is happening right now in the global equity market space to what happened last year in May and June. Do you think these parallels are justifiable and will we get off as easily as we got off in May and June last year this time?
I don't think we will go off easily and the parallels are not quite correct, obviously the markets falling is a parallel but in May-June last year the problem was an inflation scare and people in the US were thinking that inflation was going higher and the result of that would be significantly higher interest rates.
Markets began to sell off because of that. The problem right now is more related to our growth scare. The only problem here is I don't think it is a scare but a reality that growth is going to be weaker. So markets have to give potentially much further downside because it won't be a scare but will be a reality. And if that reality begins to emerge, as I think it will, then we could easily be talking for some markets, particularly the US and some of the exporters in Asia and possible weakness for the next one or two years. I think elsewhere there is much more earning support, domestic demand too is strong, which is why I have always been much more positive about India than most of the other countries in the region.
How are you feeling about India, both in terms of the rise in interest rates, the kind of inflation fears there are and when we spoke to you before the Budget you didn't expect a whole lot but on balance are you disappointed with what has been delivered?
The Reserve Bank of India raising interest rates, as well as cash reserve ratio, makes economists particularly Scottish economists, feel good and we think that is a very prudent course of action. I think RBI is now well and truly back on track to make some much more sustainable boom in India.
The inflationary consequences happening over the last couple of years will continue to bubble under the surface but I think that inflation is directing investment into exactly the right areas in India - infrastructure, as well as various other aspects of the economy and I think the monetary policy now being effected although painful for the markets in the short-term, is exactly what India needs and will help corporate earnings growth and the market over the next 12-24 months.
On the Budget, I think many people in the market were disappointed. Quite honestly, I was quite happy. The less a Finance Minister does in the Budget, the better, because the tendency is to increase Budget deficits when it is not doing a lot. I think Mr. Chidambaram basically was saying that this is as steady as you go Budget; tinkering a bit on the taxation front, I would personally would have preferred them not to do but signaling where the government really doesn't need to spend money in both human and physical infrastructure and I think both of those elements of the Budget were extremely positive. I probably view the Budget in India as more positive than most people.
One word on China and how you have read the recent statements from the government that is where the scare started this time and there are some signs or suggestions that a tightening cycle is beginning again. How do you see things panning out from there?
Yes, I think that really, the tightening cycle is not finished in China. It has been ongoing over the course of the last year. The People's Bank of China tends to be much less upfront in terms of what it is doing in terms of monetary policy than the RBI does and I think that is a problem within China - means there are no signaling things quite as clearly as they should be, but I think we will see further interest rate rises. I think we will see further interference in the investment cycle in China, to try and dump especially property and local government expenditure and I think we will see more reserve requirements ratio increases.
The Chinese have actually done quite a lot already in terms of the monetary conditions in the country, that wouldn't take effect for another six months or so, but by the end of this year we would expect China to grow significantly more weakly than at the moment and that is why you are beginning to see markets reflect the prospects of lower earnings and valuations - in the sense it is the correct reflection of the future reality.
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