"This is quite a long read but very well written and the "collective" might appreciate the insights. Niels Jensen is the MD of Absolute Return Partners with whom I am involved in a consultancy role setting up a new investment company just to let you know my involvement."

David Fuller's view Many thanks for this report and good luck with the new venture.

Fullermoney has enjoyed Niels Jensen's reports over the years and five of them can be found in the Archive. Here are two samples from the latest one on China:

As a result of the above, the Chinese leadership currently finds itself in a bit of a pickle. On one hand, indications are pretty clear that the economy is at grave risk of overheating. On the other hand, the transition of power from current President Hu Jintao and Premier Wen Jiabao to the next generation of leaders is fast approaching. Although the National People's Congress, where the new leaders will be officially instated, is not taking place until March 2012, the new power structure will almost certainly become apparent to the outside world at the next party congress, scheduled for October of this year.

Given the importance of this changeover and the significance the Chinese assign to not losing face, the leadership will do anything in its power to maintain the economic momentum until after the March 2012 congress. This increases the probability that the Chinese monetary authorities will fall further behind the curve in the months to come and make the landing so much harder when it ultimately happens.

And:

Now, let's shift gear. As always, there are two sides to the story. And despite my concerns that the current investment boom will end in tears, China presents a hugely attractive long-term investment opportunity, as it grinds its way to becoming the largest economy in the world. China is a growth story unlike anything we have ever seen and anything we are likely to ever seen again. In short, it is the fastest industrial revolution ever experienced. In the 30 years since the economic reforms began, GDP has grown by a factor 10, and GDP per capita is now almost 20% that of the United States whereas, 30 years ago, it was only about 4% the US level6

Put slightly differently, China today is where Japan was in 1950. Would you bet against China continuing on a path similar to that of Japan? I have found an interesting chart in a presentation made by Kingdon Capital Management (see chart 8), which puts the opportunity into perspective. Despite the enormously aggressive investment programme conducted by the Chinese in recent years, and despite all the near term risks that follow, the magnitude of the opportunity going forward, which crystallises when one looks at the chart, is just awe-inspiring.

My view - A deflationary depression was never likely to be the outcome following the most massive monetary stimulus in history, as this service stated repeatedly and the Archive will testify. Instead, every central bank erred on the side of inflation in response to the credit and insolvency crisis which created severe recessions in many economies, particularly in the West.

As the global economy recovered, led by Asia and the resources exporting countries, inflation has surfaced. Inevitably, these cost pressures are more apparent today in the stronger economies, of which China is a leading example. The problem has also been aggravated by La Niña, which has damaged many agricultural crops over the last nine months and counting.

I maintain that today's inflationary pressures are a bigger problem for government bonds than equities, particularly in the West where long-dated yields fell to historically low levels in 2008 and 2009. Equities are a partial hedge against inflation, provided monetary measures to contain it do not combine with rising costs to create a clear threat to corporate profits.

Commodity prices have not reached the heights that we saw in 1H 2008, but they are still rising. Consequently, they will remain a concern for financial markets. Fortunately, growth remains a priority in both the emerging (progressing) economies and the West. This may moderate upward pressure on short-term rates, particularly in the West where core inflation remains low as wage pressures are minimal.

Meanwhile, China's Shanghai A-Shares Index (weekly & daily) has absorbed a lot of negative sentiment so I am interested to see that it has has risen on seven of the last eight trading days, which span the Chinese New Year Break. The overall pattern looks like an extended base formation to me.