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HomeBeggar Thy Neighbor
Posted by Larry Doyle on October 5th, 2010 12:17 PM |
So much has happened along our economic landscape over the last two to three years that it is hard to weigh the magnitude and depth of many of the developments. That said, the simple fact is the tectonic plates underlying our global economy have shifted massively as a result of the enormous financial earthquake of 2008. While global governments and central banks have performed varying degrees of triage to save states, nations, and regions, the movements of the plates are continuing along under the surface. To that end, what is the economic reality now bubbling above the surface given the shift in our tectonic plates below? Let’s navigate and review the reality known as Beggar Thy Neighbor, defined by our friendly Investing primer as,
An international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation’s economic difficulties at the expense of other countries. While the policy may help repair an economic hardship in the nation, it will harm the country’s trading partners, worsening its economic status. (more…)
The China Syndrome 2009
Posted by Larry Doyle on November 17th, 2009 11:53 AM |
I am typically reluctant to merely link to articles which I find extremely compelling and newsworthy. I thoroughly enjoy referencing other’s works while adding my own thoughts and perspectives. That said, every once in a while an article comes along which truly deserves to be highlighted in its entirety for its depth of detail and global perspective. I find it interesting that the article I find so compelling is produced not here in the United States, but in the United Kingdom. I thank KD for bringing it to my attention.
From the Telegraph.co.uk, China Has Now Become the Biggest Risk to the World Economy:
President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears Photo: AP
“The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.
While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said. (more…)
Brazil Wants ‘Real’ity Check
Posted by Larry Doyle on October 21st, 2009 9:04 AM |
Brazil is increasingly concerned by the flow of capital pouring into its economy. Why? Isn’t that a good thing? Well, when the money is ‘fast money’ (meaning largely speculative) and it drives a nation’s currency dramatically higher, it can have an extremely negative and potentially destabilizing impact on a nation’s trade flows, primarily its exports. Let’s navigate.
There is no doubt the global markets are being driven largely by the cheap funding that is emanating from the United States. The oft-repeated statement by Fed chair Ben Bernanke that he will leave the Fed Funds rate unchanged at 0-.25% for an extended period has provided real comfort to speculators, traders, and investors around the world. What are these market participants doing? Selling the U.S. greenback to purchase a variety of global risk based assets. While investors may like positive returns generated to date on their investments, rest assured foreign central bankers are significantly less enthused with the strengthening of their own currencies relative to the greenback. Why?
As I highlighted in my weekly recap, October 10, 2009: Month to date Market Review:
While I think Washington is not disappointed in a relatively weak dollar, although they should be (”Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments.
Let’s navigate south and visit Brazil. The Brazilian currency, the real (pronounced “ray-al”), has appreciated by approximately 36% against the greenback this year alone. The real has appreciated over 50% against the greenback from its lowest valuation a few years ago. While that appreciation is a positive for Brazilian consumers, it is a major headwind for Brazilian exporters. (more…)
Dollar Devaluation Is a Dangerous Game
Posted by Larry Doyle on October 8th, 2009 9:24 AM |
Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’
Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.
Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:
1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.
2. Promotes exports for corporations with a multi-national presence.
3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.
So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?
Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)
U.S. Markets Play “Follow the Leader”
Posted by Larry Doyle on October 7th, 2009 9:40 AM |
Yesterday’s rise in rates by the Australian central bank is a bellweather sign of the global shift in the balance of economic power. While the rise in rates by the Aussies is the first central bank move, it certainly will not be the last. Why did the Aussies raise rates and what does it mean both in the short term and for the long haul? Let’s navigate.
The Australian economy did not have near the level of debt that burdens the U.S. and Europe and thus they did not need near the amount of monetary stimulus to weather this global recession. Additionally, Australia has benefited from extensive trade in the Asian hemisphere.
The knee jerk reaction in the markets was focused primarily on a selloff in the greenback which supported a move higher in commodities and global equities via the ‘positive carry trade.’ The commodity which garnered the greatest focus was gold, which moved toward $1040/ounce.
What do these moves mean? I see cross currents on the economic landscape, including:
1. The dollar may not necessarily continue to weaken, but given its current weakness it will support those companies which garner a greater degree of sales overseas.
2. A weak dollar is usually affiliated with inflation. I do not think we are in a position to look at prices in terms of one overall index. Why? Given the technical and fundamental factors in our economy, certain price components will likely project increased inflation while others will not.
To be more specific, given the labor situation in our country, I do not see any appreciable increase in wages anytime soon. In fact, I think it is likely wages will trend lower.
Given the glut of supply and vacancies in both the residential and commercial real estate markets, I have a tough time believing these prices will move appreciably higher anytime soon.
Commodities may very well move higher. Why? High five to MC for sharing with me that there is increased dialogue in the international trade community to move oil away from trading in dollars. In fact, that story likely had a big impact in yesterday’s trading. Even if there is not an immediate shift in this market dynamic, the mere fact that it is being discussed will support oil specifically, oil-based products broadly, and other commodities as well.
Given that these commodities are primarily inputs, the prices for the outputs will likely move higher. This development is clearly inflationary.
3. What happens to interest rates here in the United States? While on one hand we have some deflationary forces at work which would keep rates low, we have the tug of other factors pushing them higher. How does it play out? My gut instinct tells me that overall pools of capital will be flowing away from the United States and, as such, people and private corporations will have to pay more to attract capital here in our country. I think those entities which focus the bulk of their economic activity here in the United States will be forced to pay higher rates to attract funding.
4. What about our equity markets and the Fed? While the Fed will want to keep our rates low for an ‘extended period,’ they may not have that luxury. If other nations follow Australia in raising rates, the U.S. may need to withdraw some liquidity sooner rather than later. Kansas City Fed chair Thomas Hoenig made this very assertion yesterday.
What would higher rates mean or even the thought of higher rates mean? Slower growth and a tough road for equities going forward.
Thoughts, comments, questions always appreciated.
LD
Related Sense on Cents Commentary
Dollar Carry Trade Drives Global Equities (September 16, 2009)
Economics Trumps Politics During Times of Turmoil
Posted by Larry Doyle on September 23rd, 2009 9:54 AM |
Will the United States be able to make real progress on major diplomatic initiatives during the current economic crisis? The diplomatic path may ultimately be nothing more than a ‘road to perdition.’ Why do I feel this way? We don’t need to look all that hard to witness a number of countries pursuing economic policies at the expense of international diplomacy. During the current economic crisis, this should not be surprising. Political leaders of all stripes will sacrifice principle in an attempt to appease and assuage the economic pains of their electorate.
I do not pretend to be a political scientist nor an economic historian, but I believe I understand enough about market forces to view these economic maneuvers by a number of countries as nothing more than an international version of Game Theory.
This gamesmanship is playing out across the world stage from political hot spots to the friendly confines of our nation’s backyard. The Financial Times prominently highlights a wide array of nations pursuing their economic interests via increased trade with Iran. This trade flies right in the face of Washington’s hopes to curtail the development of Iranian nuclear capabilities.
The FT writes, Beijing Begins Petrol Supplies to Iran:
Chinese state companies this month began supplying petrol to Iran and now provide up to one-third of its imports in a development that threatens to undermine US-led efforts to shut off the supply of fuel on which its economy depends.
While China would maintain that it is pursuing diplomatic initiatives to curtail Iran’s development of nuclear weapons, make no mistake China and other countries will look for any market to fill the enormous decline in exports which previously flowed to the United States. The FT further highlights this very point in writing, Business at Sharp end of Iran Sanctions. Despite legislation enacted in Washington to address nations trading with Iran, the legislation lacks enforcement powers. As a result, nations that are flush with oil or other commodities, but relatively cash poor, will pursue trade alliances which benefit them economically. The FT writes as much:
Hojjatollah Ghanimi-Fard, the vice-president of National Iranian Oil Company for investment affairs, said Iran had a “big list” of suppliers “scattered” around the world and that it was “very easy” to replace one with another.
We should not be so naive to think that this economic gamesmanship is only occurring in political hotspots. If we look hard enough, we can see that the U.S. is pursuing economic benefits at political expense even with our Canadian friends. A recent visit to Washington by Canadian Prime Minister Steven Harper was for the purpose of addressing increasing U.S. protectionism right here in North America. While Harper and Obama ‘smiled for the cameras,’ the relationship is becoming increasingly strained by U.S. protectionist tendencies. A specific example is embedded in Obama’s proposed cap and trade legislation. Harper addresses this issue in a recent New York Times commentary, Harper on U.S-Canada Energy Relations:
Mr. Harper said that while Canada and the United States shared the goal of combating climate change, he disagreed with one provision in the Waxman-Markey climate bill that passed the House of Representatives in June. That provision would impose tariffs on countries that did not keep their emissions under control.
Such a measure “would become a front for protectionism quicker than you can say ‘hello,’ ” Mr. Harper said.
Hello indeed and welcome to a world in which sovereign economics will continue to trump international diplomacy and politics for the foreseeable future. The immediate benefits of these pursuits will come at the expense of significant risks down the road.
LD
