Currency Currents - November 30, 2009
Key News
• The central bank of the United Arab Emirates is closely watching events stemming from the Dubai debt crisis to ensure no harm results for the national economy. (Reuters)
Quotable
“Credit is a system whereby a person who can’t pay gets another person who can’t pay to guarantee that he can pay”
Charles Dickens
FX Trading – Oh the nasty “tail” risk and lending “reflexivity”…
Gosh, it was looking so good. All those buildings, fancy shaped islands, money, and oil wealth. Who would’ve thunk it? Well, not the credit analysts, we know that now.
Source: Bloomberg- The Palm Jumeirah development, also known as Palm Island in Dubai.
Nov. 27 (Bloomberg): “One cannot rule out — as a tail risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
We’ve seen this all before. Since the day credit through the art of lending was created, many years ago.
“There seems to be a special affinity between reflexivity and credit. That is hardly surprising: credit depends on expectations; expectations involve bias; hence credit is one of the main avenues that permit bias to play a causal role in the course of events. But there is more to it. Credit seems to be associated with a particular kind of reflexive pattern that is known as boom and bust,” Mr. George Soros tells us, in his masterpiece on investing, The Alchemy of Finance.
“The pattern is asymmetrical: the boom is drawn out and accelerates gradually; the bust is sudden and often catastrophic.”
This Dubai situation would seem to have two major implications for the broader global economy:
1) It shows that lending is still flowing from the center to the periphery despite all those reserves and savings we are told reside in emerging markets i.e. the center, being Western banks and capital markets, provide credit to the periphery, being emerging markets of the world. This is why the word “contagion” and “tail” risk are used in association for this type of boom-bust event.
2) It is a lesson that goes beyond emerging markets and to the “at the margin” declining stimulative impact of additional lending by governments of the world. Increasingly the players are realizing all that so-called lending hasn’t created all that much stimulus.
Back to Mr. Soros for help, “The act of lending usually stimulates economic activity. It enables the borrower to consume more than he would otherwise, or to invest in productive assets. There are exceptions, to be sure: if the assets in question are not physical but financial ones, the effect is not necessarily stimulative. By the same token, debt service has a depressing impact. Resources that would otherwise be devoted to consumption or the creation of a future stream of income are withdrawn. As the total amount of debt outstanding accumulates, the portion that has to be utilized for debt service increases. It is only net new lending that stimulates, and total lending has to keep rising in order to keep net new lending stable.”
Problem number one in this current precarious process: Right now governments are playing that role of lender of last resort. Yet they are running out of our money (Mr. Taxpayer’s hard earned bounty so legally confiscated).
Problem number two is this: Private lenders (banks) are not playing the role intermediary i.e. lending the money received from government (our money) to the people from which it came, who live and work in the real economy. Key question: Wouldn’t massive tax cuts have been a much simpler and more effective way to create real spending power for the people you wish to spend it? Sorry, we can’t mention the word tax cuts to liberals—those are class-warfare fighting words—how dare we utter such nonsense!!! Three deep bows of apology to our current “governing” regime.
Problem number three: Financial assets (stocks, bonds, risky assets, emerging market anything) has been sucking up all the lending flow that has not gone into the real economy, and held on said intermediaries balance sheet i.e. resources have been diverted for financial speculation instead of building futures streams of income, for the most part. Thus, the growing disconnect between reality and perception. Any wonder why the Government of Goldman Sachs is embarrassed about its bonuses.
S&P 500 Index (red) vs. US $ Index (black) Daily:
Can you say Dubai? Sure, I knew you could! Have a nice weekend boys and girls.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Long-term trends, major global economic issues, interviews with top traders, book reviews…
We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - November 25, 2009
Key News
• The number of newly laid-off workers (US) filing claims for unemployment benefits fell more than expected last week to the lowest level in over a year. (AP)
Quotable
“The common curse of mankind, — folly and ignorance.”
William Shakespeare
FX Trading – Fed Fantasy: You can’t make this stuff up
Financial Times: Federal Reserve officials have expressed concerns that near-zero interest rates could fuel “excessive risk-taking in financial markets” but believe the possibility of such an outcome is “relatively low”, minutes from its November meeting show.
Say what? Is that a misprint? Is it parallel universe time? Mr. Einstein, please call your office!
“Could fuel risk taking” but the possibility of that happening is “relatively low”? What the heck? Has anybody checked the Hallowed Halls of the Federal Reserve in Washington D.C. to see if maybe there isn’t a whole bunch of Chinese drywall behind all that rose-colored paint? People have been known to hallucinate from Chinese induced fumes in the past.
Has anyone at the Fed been paying attention for let’s say—the last seven years? Low interest rates—effective free credit—is responsible for almost all economic ills which ail us. Yet we get that claptrap from Fed “minutes.” Maybe these things need to be renamed more appropriately—Fed Minutes of Delusion Not Ready for Prime Time. And these people have PhD’s in Economics. Yikes!!!!!!!!!! Very scary for anyone aspiring to such a lofty level…I now thank goodness I wasn’t that good with math or I may have swerved into the land of the economic brain dead too during my academic years.
Amazing!
And we wonder why the US dollar index made a fresh new post credit-crunch low this morning? With the FOMC Keystone Cops at the wheel, the fact that the dollar isn’t in all-time new low territory is what’s shocking. Ron Paul was so far ahead of this ugly curve it’s not even funny. Maybe this latest fantasy fabricated from the Fed will finally wake up the “Fed is so independent and vital to our economic interests crowd,” a crowd that rarely does any independent thinking for they are too busy feeding at the teat of Washington zeitgeist.
Mr. Paul has always believed the Fed created more trouble than it has ever been worth. There have been many before him who thought the same, only to be steamrolled by the political special interest who seem to always be the biggest dependents (you know the names) of so-called Fed independence—an oxymoron indeed!
If I remember correctly, at another place, and another time, maybe another universe, there was a very smart man with common sense. His name was Milton Freidman. Mr. Freidman nailed it many years ago when he suggested the Fed, or Federal Open Market Committee, should be replaced by a computer that buys and sells bonds in order to maintain the money supply at around the natural growth rate of the economy.
Wouldn’t that have saved us all a whole bunch of jobs and real wealth; not mention all those congressional testimonies that are beyond excruciatingly painful in so many ways.
Ever since congress, at the urging of a small elite group of “economic thinkers” and control freaks from a small island off the coast of Georgia, called (Dr.) Jekyll Island, breathed life into the contraption we call the Fed, bad things economic have ensued.
It shouldn’t be this hard to inject some common sense into US economic policy—it just shouldn’t. But, as my mother, always said—there is no such thing as fair in the world, there just is, so learn to deal with it. This she learned by watching my grandfather working many awful jobs, all the time, in order to barley feed his family during the last great depression; another massively awful business cycle downturn bestowed on us by the great men at the Fed thanks and their easy money policies to support their “independent” interests.
When something doesn’t do what it’s supposed to do, why do some continue to pretend it does? Easy answer; because they benefit from the system no matter how flawed.
Below is a sampling of real knowledge from the Great One; a man who by the way was shunned by the so-called economic elite of his day. The PhDs in economics then and now couldn’t carry his proverbial jock strap, yet they never gave the Great One the title of professor here in the US. His views were just not in with those that really knew what was going on the “modern” economy. Some things never change…
“The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy.”
“The cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business conditions designed to lower the rate of interest below the height at which the free market would have fixed it.”
“There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way.”
Ludwig von Mises
Case closed!
US $ Index Daily
Happy Thanksgiving!
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Long-term trends, major global economic issues, interviews with top traders, book reviews…
We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - November 24, 2009
Key News
• ECB prepares to end emergency funds (Financial Times)
• German Business Confidence Increases to 15-Month High, Exceeding Forecasts (Bloomberg)
• Mexico Peso Set to Rally 20% as Pimco Says Buy After Fitch Debt Downgrade (Bloomberg)
Quotable
“Alea iacta est.”
Julius Caesar
FX Trading – A Good Price for the Euro
Perhaps you saw this morning’s release of Euroland’s economic data.
German GDP jumped by 0.7% in the third quarter. Adding to GDP was an inventory build and capital investment; subtracting from GDP was consumption and trade.
Not so stellar, but somewhat reassuring nonetheless, was an increase in new industrial orders – rising 1.5% since last month but still down more than 16% from a year ago.
Is there still cause for concern among these and other improvements in official numbers?
I’d ask whether inventory-led growth is sustainable without a better contribution from consumption and trade. And I’d ask whether growth in new orders, buoyed largely by those for new freight equipment, can be sustained.
But regardless of what I’m asking right now, business morale in Germany has hit 15-month highs. That makes eight increases in a row and should build confidence among investors who realize too that Germany still has a lot riding on manufacturing and trade.
Oh … and another question: will the strength of the euro restrict Germany’s potential?
No doubt, this overvaluation relative to the dollar is getting on the nerves of global central banks, enough so that they feel the need to comment on the fact. Will the euro have an impact on Germany? Probably some. Will that change the value of the euro? Not that fact alone.
The euro’s been consolidating after making a test of the $1.50 level. And while we wonder if $1.50 is a hurdle the euro will have trouble with, the technical picture looks familiar, as the euro’s been able to break out from similar patterns along its uptrend this year.
A break to new highs any time soon would build a case for the euro to reach the $1.60 mark – a level not seen since before the global financial crisis.
The big difference then was a global economy that was still moving along relatively well, albeit immersed in excess liquidity up to its eyeballs. Right now it’s different; and while I don’t want to take away from the recovery potential that exists for the euro, there seems little to justify the common currency reaching $1.60 any time soon.
Unless, of course, you recall that the US is the compost pile of the global financial garden. The only thing that’s going to grow there is a bunch of cannibalistic organisms serving to decompose anything hanging on to life.
And in this relative game, an empty dollar means a well-founded euro. Do I hear $1.60, anyone?
Thanksgiving is only a few days away … and you know what that means – Christmas music! (I particularly think it’s too early for Christmas music, but when has what I thought mattered?) Fitting this wonderful world of currencies into the joy of Christmas, here’s a little jingle that you may have heard before, in one form or another:
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Long-term trends, major global economic issues, interviews with top traders, book reviews…
We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - November 23, 2009
Key News
• The euro zone’s dominant service sector grew at its fastest pace in two years in November suggesting an economic recovery will continue in the fourth quarter, albeit at a slower rate, a key survey showed on Monday. (Reuters)
• Thailand’s economy showed a modest growth in the third quarter as economic conditions at home and overseas slowly recovered, stoking enough confidence for the government to forecast a rebound in growth in 2010. (WSJ)
• New Zealand consumer confidence declined for the first time in five months in November. (Bloomberg)
• Chicago Federal Reserve President Charles Evans expects U.S. unemployment to peak at around 10.5 percent next spring. (Reuters)
• Singapore’s consumer prices fell in October for a seventh month. (AP)
Quotable
“[T]he sanguine outlook embedded in US bond markets creates risks for central banks wishing to tighten policy ahead of the major central banks. Synchronised policy easing to fight off the Great Recession means that the world’s central banks will also be tightening monetary policy in a cluster, much like cyclists in a peloton. The front riders in a peloton typically have more flexibility but also face stronger headwinds than the other riders, who are content to reduce their wind-drag by riding in the mass of the group. Early-hiking central banks, similarly, face the dual headwinds of currency appreciation and unresponsive asset markets since the latter have strong ties to their counterparts in the major economies. Low bond yields in the US and other major economies tend to put downward pressure on bond yields elsewhere in the world. Early-hiking central banks like the BoI, the RBA and the Norges Bank, and later the RBI and the BoK, will likely find it difficult to raise long-term interest rates while bond yields in the major economics are priced for perfection…for now!”
Manoj Pradhan, Morgan Stanley
FX Trading – Regulatory Bank Cure – A Massive Unintended Fear Move to Gold?
John Ross wrote in a recent Currency Currents he didn’t want to rip-off the Milk Board advertising campaign by asking if you’ve “Got Gold.” But it appears more and more have “Got Gold.” Yet another new high was chalked up this morning in white-hot yellow metal. This comes at a very bad time for me and may reflect a lot deeper systemic concerns than we now realize.
Long-timer readers have heard the story of my father in law, whom I love dearly (most of the time). My father-in-law (MFL) has held gold and silver for a long-time, as long as I have been dating his best asset—that is going on 34-years now. MFL has been known to hide buckets of coins and said precious metals in his walls at times, which should give you an idea of just how much of a bug he is. MFL will be attending the Crooks Thanksgiving feast on Thursday, thus my problem now that gold has surged again into the ozone (as I remember many times I shared the view with MFL that gold would never get above $1,000 again). Thursday will be a day of Turkey, football games, and “I told you so” gold investing gloating—rightfully so I guess. But, I can take solace anyway, as he loves his daughter, and gold is doing good things for his estate.
That long winded entry was an attempt to make this point: I think the gold move now represents much more than a US dollar fear move. As we’ve pointed out before, gold in a massive new high, and yet the US dollar index has still not breached its old low (presently the $ index is trading about 7% above its March 2008 low). The move in gold appears to be more systemic, especially when you factor in the potential for disruption in the things we used to consider risk-free—government bonds.
In a great piece from Financial Times writer and assistant editor Gillian Tett, “Could sovereign debt be the new subprime?” she writes [our emphasis]:
“[A]s policymakers rush to implement reforms in response to one financial calamity, they are apt to create distortions that pave the way for the next disaster. Just such an unintended consequence could now be festering in the banking sector, as its balance sheets are increasingly stuffed with government bonds.
“These days, there is a near-unanimous belief among western regulators that one way to prevent a repeat of the 2007-08 crisis is to stop banks taking crazy risks with subprime mortgage bonds or complex instruments such as collateralised debt obligations (CDOs). Instead, banks are being urged to hold a higher proportion of their assets in the form of ‘safe’ instruments, most notably sovereign or quasi-sovereign debt. G20 regulators are holding regular meetings in Basel to draw up rules on how banks should do this, as part of a wider reform of financial regulation.
“In theory, that move sounds very sensible. One reason why large banks crumbled last year was that many were carrying vast quantities of highly rated CDOs and other toxic paper. These not only lost their value during the crisis, but also became impossible to trade, creating a liquidity shock for the banks.
“Government bonds, by contrast, remained liquid during the recent crisis (and have been so in the past few decades). So it appears appealing to hold more of them, particularly given that sovereign debt is also widely presumed to be ultra safe; so safe that the yield on government bonds is known as the ‘risk-free rate’.
“But could this flight to the ‘safety’ of government bonds in itself be creating subtle new dangers?Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain – not least because with yields currently so low there is less pressure on politicians to push through reform.
In other words, the bank regulatory cure which governments are so proud of is part and parcel to the massive global liquidity bubble being created. Gee, unintended consequences flowing from governments who typically lag the real world by a massive degree? Now that’s just shocking!!
Back to Gillian:
“Finance ministries are hardly likely to complain about the banks’ investments. Major industrialised countries will need to sell more than $12,000bn worth of government bonds this year and next to fund their fiscal hole. This is a rise of at least a third, or $3,000bn, in just two years.”
The government, thanks to its reform, has insured ready buyers for all its paper; this allows them to more easily paper-over the initial stimulus they created, with taxpayer money, which ended up to a large degree on the balance sheets of the same banks (thanks to the incentive of risk-free spread borrowing at zero and holding government paper at 3%) that will be buying more of the paper created to cover the holes created by the stimulus, which will be eventually plugged by more taxpayer money.
Convoluted? It’s not hard to see why unintended consequences can flow from that sequence of blunders is it?
Credit default swaps (yet another invention from our Wall Street Frankenstein builders) are reflecting growing concern among sovereign debt of core European countries—Greece, Italy, Spain, Portugal (PIGS when put I the right order), add Ireland, Iceland, Eastern Europe, etc. Fitch has already warned the UK on debt and the possibility of a ratings downgrade. Japan now above 200% debt to GDP recently received a stern Fitch lecture. And of course, the risk-free or all standard risk-free credits, the US, can’t continue to skate by given their massive fiscal irresponsibility consistently flowing from its policies.
Thus, if the risk-free rate, upon which a whole lot of financial theory and portfolio modeling is based, becomes in doubt, the game changes in a big way, and not a good way. A search for risk-free may come right back to the question: “Got gold.” I’m sure it’s a question I will get on Thanksgiving Day.
Gold (black) vs. US 10-yr Treasury Note prices (red) Weekly:
Happy Monday!
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Long-term trends, major global economic issues, interviews with top traders, book reviews…
We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In our November issue, we published a great interview with former Olympic bobsledder, and now FX trader/teacher extraordinaire, Mr. Chris Lori. He shared some incredible insights about trading and the currency markets with our readers. Thanks again Chris.
We also took a look at the key long-term wealth drivers for the emerging markets that will be in play for many years to come.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else.
Thorough global analysis plus complete investment guidance … and all for only $39 per year? You can’t beat that with a stick. Click here to read more …
Currency Currents - November 20, 2009
Key News
• The Bank of Japan kept interest rates near zero. (Bloomberg)
• Asian policy makers are studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate. (Bloomberg)
• Pacific Investment Management Co., manager of the world’s biggest bond fund, said China’s yuan, South Korea’s won and the Singapore dollar offer “attractive value” because central banks need to counter inflation. (Bloomberg)
• Poland will be the only European Union country to escape recession in the global economic crisis, which will hit the Baltic countries especially hard, the EU’s executive forecast on Tuesday. (Reuters)
• In Hungary, the recipient of a $25.1 billion International Monetary Fund-led bailout after years of fiscal profligacy, the economy is expected to contract by 6.5 percent this year, shrink 0.5 percent in 2010 and grow by 3.1 percent in 2011. The Commission said Hungary could overshoot its budget deficit targets in both 2009 and 2010. This could put the financing agreement with the IMF into jeopardy. (Reuters)
Quotable
“Japan doesn’t need a stronger yen. Japan needs deregulation of its labor and capital market, privatization of state-owned industries, and a more pragmatic, progrowth domestic industrial policy focused on excising vested interests and the rigidities of domestic service industries. The promotion of growth and entrepreneurship is the only way to generate the kind of employment that the DPJ promised on the campaign trail. Unfortunately, this kind of policy path is particularly difficult for Mr. Hatoyama’s government, which is heavily reliant on labor unions for political support.”
FX Trading – Friday Ramble
I noticed a Reuter’s poll today. All the top banks were asked to provide their guess on just how undervalued the Chinese currency—yuan- was against the US dollar. The average guesstimate was about 20%. That’s about 20% lower than my guess would have been, but no matter. What was interesting was their guess about when the Chinese currency would actually become convertible.
Drumroll……………………………………………………………………………………………………………………………………………………………………..2020!
Man, that’s a long time for the nut-job newsletter writers (guilty as charged, but not of this crime) to be shouting the “US dollar will disappear.” I told you about one enlightened fellow who gives it a 10-year time frame before the buck goes bye-bye. But there is another, a guy at a yet another major newsletter firm actually has a 2-year target for dollar disappearance. Of course they know better—but it sells subscriptions. It’s amazing! His readers lap it up as if tablets were just brought down from the mountain top; I guess it goes to the point about investing: People want to be validated; at least novice types (and gold bugs). I think, thinking people want a good dose of skepticism, as John Ross discussed so well in yesterday’s issue.
Black Swan simply has a lot higher caliber of subscriber. We are thankful and fortunate.
Okay…next topic, it seems pressure is building for Asia to get serious about currency suppression, or the flip side, for the US to get serious about dollar dumping. This comes interestingly on the heels of more news which is eliciting that special “double-dip felling” deep down in our gut. Yo, Larry! Larry! Oh, yeah…Master Summers Sir! The US economy isn’t recovering the way you and your minion of neo-Keynesian cronies have told us it would.
What made us laugh out loud yesterday was President Obama’s warning about too much US debt. It was one of those “say what” moments.
President Obama—knock-knock—is anyone home up there or do you think we are just that stupid. Your economic team knows only one policy; it is to create more debt and soak small businesses and payoff lobbyists, and Wall Street, and….(sorry). Your team’s public debt policy will likely be the driver of US productivity for years to come, the unintended, yet foreseen by anyone not blinded by Keynesian cons, consequences of your efforts to stimulate productive capacity.
It is to laugh, but it is so painful to watch. No matter how many times you read General Theory you won’t find the answers. Do you mind sharing that with Master Larry? No one else seems to be brave enough to share that idea with the Man.
Three more years—Atlas is shrugging indeed.
Asked this question on our webinar about emerging market currencies yesterday: Why could the US dollar rally? My answer: A risk event. The bigger the event, the more the dollar rallies. There appears darn little on the horizon to suggest there is anything good fundamentally to move the dollar higher.
But thanks to awful US economic policies, and growing concern about the Baltics, Hungary, Ukraine, and Greece, not to mention bubble-iscous conditions in China, that risk event may be just around the corner. If so, the dollar goes higher. Simple as that…even it disappears in two years…it goes higher on risk here.
US Dollar Index Daily: Dollar has retraced just over 76% from its post-credit crunch high…
…and almost every person we know out there—with a pulse—thinks it will make a new low and beyond.
….but we urge some caution to the cocky crowd. We’ve seen this before. It was the great dollar bull market (yes newsletter writers, there actually have been some, though they have carved out lower highs and lower lows for good reason) of the 1990’s when Mr. Market pulled a wildcard from the bottom of the deck…
1992 (beginning of the bull market that rallied the dollar index from 78 to 121—a nine year move); the dollar retraced over 80% of the ’92-’93 rally; most believed the long dollar bear market dated from around ’85 was still underway. Hmmm…
Am I simply finding past facts to fit a fantasy story. Maybe! But at least this story has a modicum of plausibility. If you think the dollar is going away anytime soon, and the Chinese currency will replace it, I want a huge piece of the other side of that bet.
Happy Friday!
Jack Crooks, Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - November 19, 2009
Key News
• BRUSSELS, Nov 19 (Reuters) - Top euro zone officials will urge China this month to move towards a more flexible exchange rate policy but it will not be easy to introduce change soon, EU Monetary Affairs Commissioner Joaquin Almunia said on Thursday.
European Central Bank President Jean-Claude Trichet, the chairman of euro zone finance ministers, Jean-Claude Juncker, and Almunia will travel to China at the end of November for talks on exchange rates.
“We will stress to the Chinese authorities the need to introduce a more flexible management of exchange rates,” Almunia told reporters on the sidelines of a conference in Brussels.
Quotable
“If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”
Zhang Xin, quoted in the Financial Times
FX Trading – Your recommended daily allowance of skepticism
For the past year – since November 4, 2008, actually – I’ve thought about walking around wearing a T-shirt that reads:
Where’s your skepticism?
That way I could maybe get the majority’s brains turning a little bit. (I’ve thought about using “Got skepticism?” but figure milk is probably tired of getting ripped off over and over again.)
Not to belabor the point, but skepticism is the antithesis of consensus. And in the market, skepticism can be informative but it’s not necessarily the best approach to making money.
To paraphrase one of Jack’s favorite quotes about trading from Jesse Livermore:
“For a trader it is better to do right than be right.”
In other words, your analysis doesn’t matter if you’re not complementing it with winning trades or profitable investments.
Don’t get me wrong – skepticism serves an important purpose of dispersing truth, or facts, or potentialities. And while the consensus serves a purpose too – signaling where the money is – it tends to mitigate the importance of truth, facts and potentialities.
“For a trader it is better to do right than be right.”
Sadly, though, those in bed with the consensus who emerge proudly claiming omniscience are those that are heard the best.
I mean, at a time like this, someone could shout:
“I’m 100% certain the US will experience hyper-inflation.”
Or …
“I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again.”
Or …
“The sky is the limit.”
Wait a second – somebody has said all those things. His name is Marc Faber. (Sorry Marc – you and I both recognize the entertainment value of these little quips!)
In an era of unprecedented money-printing and official stimulus, why be skeptical of hyperinflation predictions?
And in a time when gold prices are making new all-time highs day after day, why be skeptical of the fact that the shiny yellow metal will never break below $1,000 an ounce ever again?
And why ask how high the sky is? Or why ask if there actually is a limit on rising gold prices?
You’re better off not being skeptical, right?
But the truth is, I think, that hyperinflation is not a certainty. Please, someone correct me if I’m wrong! In fact, deflation is still the bigger threat in the near-term, in my book; and by the time that threat or reality is eliminated things will be different and inflation may or may not spiral out of control.
And boy, will I be surprised if gold never breaks below $1,000 an ounce ever again. Could the global stabilizers not pull another rabbit or two out of their hats and effectively reduce the appeal of gold. Even a correction to the $900s will simply be a blip in the unbreakable and all-powerful uptrend of gold.
But am I alone here? People are buying up gold like the sky is the limit. The safety net gold offers to the imminent disappearance of all paper currency is a great story that people want to believe; right now it’s the consensus in that market.
There’s no denying the places that have made money in the recent past:
Short the US dollar
Long gold
Long commodities
Long stocks
Long emerging markets
And there’s certainly potential that these investments will continue to deliver. And chances are you’ll hear about it all along the way.
But complacency combined with consensus can leave you vulnerable. I mean, you’re liable to get blindsided if you don’t possess a shred of skepticism when it comes to all the brightest stars telling you what everyone already knows.
Chew on this:
BRASILIA, Nov 18 (Reuters) - Brazil took another step on Wednesday aimed at containing the appreciation of its currency, unveiling a 1.5 percent tax on certain trades involving American Depositary Receipts issued by Brazilian companies.
The tax will be charged when foreign investors convert ADRs for Brazilian companies into receipts for shares issued locally. It aims to close a loophole that allows investment to flow into local stocks tax-free.
Brazil, who recently implemented a tax on foreign money flows into Brazilian investments, is now taking another step to keep the hot money at bay.
Why? Because the Brazilian real has already skyrocketed this year, and the more it appreciates the greater the adverse economic impact becomes.
But this problem is not solely Brazil’s; many emerging markets have seen their currencies surge as the US dollar has been beaten down for reasons widely known. But as everyone expends energy to escape the global recession, it’s not fun having a major headwind to battle.
For now, the jawboning surrounding emerging currency appreciation won’t be making a huge difference; only Brazil and Taiwan have actually taken action. Others have discussed potential capital controls but have not yet moved to action.
My obvious skepticism begs the question: what happens when a new country comes on board? What happens if more and more countries become so fed up with a lower US dollar that they enact policies to stem their currency’s appreciation?
As much as the consensus helps drive money flow, they tend to lag major shifts in sentiment and capital. Might there be a dramatic change of fortune for the US dollar and all the asset classes so dependent on its every move these days?
There might.
But there might not.
Just know that it’s far less of a sure-fire bet than many will have you believe.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
IT’S HERE!
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Currency Currents - November 18, 2009
Key News
• Mexico and Colombia plan to sell Samurai bonds, joining Poland and the Philippines in turning to Japanese investors for funding as governments grapple with budget deficits. (Bloomberg)
• South African retail sales fell an annual 5.1 percent in September, more than economists forecast. (Bloomberg)
• U.S. mortgage applications fell last week, with demand for home purchase loans dropping to a 12-year low even as interest rates on 30-year loans fell to their lowest level in six months, data from an industry group showed on Wednesday. (Reuters)
• Builders in October unexpectedly broke ground on fewer U.S. houses. (Bloomberg)
Quotable
“Nobody realizes that some people expend tremendous energy merely to be normal.”
Albert Camus
FX Trading – Oh yen, we wonder when…
We are taking a little break today. In place of my usual ramblings, below is an excellent article by Chris Fournier and Yasuhiko Seki of Bloomberg laying out the case for a weak yen based on the very ugly set of economic fundamentals and debt picture facing Japan.
Maybe USDJPY goes lower as institutional money is repatriated back into Japan given rising domestic risk. But sooner or later we think Japan’s economic fundamentals will feed into the currency in a big way.
Nov. 16 (Bloomberg) — The yen is poised for its worst tumble since 2005 as doubts about Japan’s fiscal footing double the cost of insuring its debt.
The price of hedging against losses on $10 million of the country’s bonds with credit-default swaps soared this month to as much as $76,160 a year from $37,000 in August, as the new government planned record spending and borrowing even with tax revenue falling. The rise in debt protection costs contrasts with that of the U.S., where prices have fallen to about the lowest in a year amid unprecedented issuance. The difference in prices reached the widest ever on Nov. 9 after Japan’s debt grew to almost twice the size of the economy.
“The Japanese fiscal situation is horrific,” said Richard Benson, who helps oversee $11 billion of currency funds at Millennium Global Asset Management in London. “We went short the yen against the dollar and the euro about a month ago” and then turned “more aggressive” on the trade as credit-default swaps rose and investors dumped Japanese bonds, he said, declining to specify the firm’s gains. Selling yen for euros and dollars would have returned as much as 4.3 percent since Oct. 1, data compiled by Bloomberg show.
Japan’s unprecedented debt, near-zero benchmark interest rate, ballooning budget deficit, sinking savings rate and worst postwar recession all are aligned against the yen.
Standing Alone
The Bank of Japan will stand alone in keeping borrowing costs at near-record lows next year to revive the Group of 10’s fastest-shrinking economy, making its assets less attractive to investors, median Bloomberg survey predictions show. The world’s second-biggest economy last year at $4.9 trillion will contract 5.7 percent in 2009, compared with an average of 2.5 percent for the nine other largest economies, according to median forecasts.
“We can’t rule out the possibility of capital flight away from Japan due to its deteriorating fiscal position,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank.
The yen has outperformed all 171 other currencies tracked by Bloomberg over the past two years, appreciating 24 percent to 89.45 per dollar today. The currency is up 12.9 percent from a five-month low on April 6, and has gained 1.3 percent this year. Now, 34 of 38 strategists in a Bloomberg survey see it falling by June 2010, including Landesbank Baden-Wuerttemberg, the most accurate of 46 forecasters in the six quarters ending June 30.
Steep Tumble
The Stuttgart-based bank predicts a 9.9 percent decline to 100 from 90.09 at the end of October, which would be the steepest eight-month drop in four years. Goldman Sachs Group Inc. in New York forecasts 105 in 12 months, a 14.8 percent slide from the Nov. 13 close.
Option traders are the least bullish on the yen since July 2007 after the spread between demand for three-month contracts to buy and sell the currency narrowed by the most ever in the past year, so-called risk-reversal rates show.
“Declines in risk reversal rates suggest underlying strong pressure to sell the yen,” Societe Generale’s Saito said.
Outstanding government loans and bonds totaled a record 864.5 trillion yen ($9.6 trillion) on Sept. 30, making Japan the world’s most indebted nation. That’s 181 percent of gross domestic product, up from 94 percent a decade earlier and the most among the 30 countries of the Organization for Economic Cooperation and Development, which averages 79 percent. The U.S. has about $7 trillion of marketable debt outstanding, or about 50 percent of its GDP, according to government data.
Increased Unease
While credit-default swaps indicate less than a 6 percent chance the world’s second-largest foreign-reserves holder will default, they show increased unease with the debt’s quality.
The five-year contracts cost 67.42 basis points, or 0.6742 percentage point, of the sum covered a year. Of 20 developed countries tracked by Bloomberg, only Greece, Ireland, Spain and Italy have pricier swaps. Insuring the debt of Slovakia and Slovenia, which have the same credit ratings as Japan or worse, is cheaper.
Hedging against losses on U.S. bonds cost 27.5 basis points on Nov. 13, down from 100 on Feb. 24. The U.S. will sell a record $2.1 trillion in Treasuries this year and $2.5 trillion next, according to London-based Barclay’s Plc, one of 18 primary dealers that trade with the Federal Reserve. Government bond yields are used as a benchmark for companies such as Shiseido Co., Japan’s biggest cosmetics maker, and brewer Kirin Holdings Co. as they sell debt.
‘Difficult’ Situation
“It’s not really a question of default” by Japan, said Carlos Leitao at Montreal-based Laurentian Bank Securities, the second-most accurate economist in a Bloomberg survey last year. “It’s more the situation becoming so difficult, the government is forced to adopt more restrictive fiscal policies to bring deficits under control. That would further slow the economy.”
Finance Minister Hirohisa Fujii said on Nov. 10 that “maintaining the trust of investors in the government bond market is our priority” because “the most pressing issue we have to bear in mind when we outline next fiscal year’s budget is that government bond yields are surging.”
International demand is already faltering. Foreign investors have sold a net weekly average of 130 billion yen in Japanese bonds this year, after averaging 94 billion in purchases the prior five years, Ministry of Finance data show.
Yields on 10-year bonds, which reached 1.485 percent this month on an intraday basis, the highest since June, may rise toward 1.7 percent, said Kazuto Uchida, chief economist for Bank of Tokyo Mitsubishi UFJ Ltd., Japan’s biggest lender.
Interest Expense
Japan will spend 10.2 trillion yen on interest payments this year, or 26.2 percent of tax revenue, up from 18 percent in 1990 and 18.9 percent in 2004, JPMorgan Chase & Co. of New York estimated in an Oct. 21 report. The percentage may rise to 36.8 in 2014 and 73.9 in 2019, the bank estimated.
Domestic buyers will shore up demand for the securities, limiting yield increases, according to Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd.
“The sell-Japan campaign is not likely to become a mainstream move, given the fact that Japanese investors hold over 90 percent of outstanding debt issued by the government,” said Kurose, whose employer is part of the nation’s fourth- largest banking group. “In a country like Japan, where there’s a stable current-account surplus, rising debt issues won’t push up yields perpetually.”
Japan almost always exports more than it imports, current- account data show. That broad trade measure shows its surplus rose 0.2 percent to 1.57 trillion yen in September from a year earlier after also rising in August — the first two straight increases since early 2008, the Finance Ministry said Nov. 10. The surplus allows Japan to finance deficit domestically so it doesn’t have to rely on overseas lenders.
Saving Less
JPMorgan said in its report that Japan’s dependence on domestic bond buyers may hurt demand. Such investors owned 93 percent of the government’s debt as of December, according to a ministry report. Because the Japanese are saving less, they will buy fewer bonds and drive yields up, the bank said, predicting that average families will be squirreling away none of their income within five years, down from about 17 percent in 1980.
“A reasonable estimate that falling savings pushes interest rates higher” by 2 percentage points “would quadruple debt service costs in 10 years,” JPMorgan said.
Vice Finance Minister Yoshihiko Noda estimated last month that bond sales may hit 50 trillion yen in the fiscal year that started April 1 due to slumping tax revenue, up from the unprecedented 44 trillion estimated in a budget that called for spending a record 102.5 trillion yen.
Falling Revenue
Tax revenue from April 1 through Sept. 30 totaled 10 trillion yen, 24 percent less than at the same point in the prior fiscal year and the least in 11 years or more, Finance Ministry statistics show.
Japan’s deficit “is one of the most significant negative factors” weighing on its credit rating, said Takahira Ogawa, Singapore-based director for sovereign rankings at Standard & Poor’s. S&P isn’t considering changing its “stable” outlook for Japan’s AA international-debt grade, the company’s third highest, he said.
Fitch Ratings may review its AA- grade on locally denominated debt if the country violates its pledge to keep next fiscal year’s bond-issuance below 44 trillion yen, said David Riley, the firm’s head of sovereign ratings in London, in a Nov. 10 Reuters Television interview.
“Economic conditions point toward a possibly extended period of deflation,” Riley said in a Nov. 10 statement. “Should this happen, it will represent a material risk to the public debt outlook.” In a Nov. 13 e-mail, he said he “cannot comment” on what sum might “trigger a rating action.”
Japan Deflation
Consumer prices in Japan have fallen from a year earlier for eight consecutive months through September, including a July’s unprecedented 2.3 percent drop. Median quarterly forecasts predict that trend continuing through mid-2011.
“If Japan’s sovereign debt loses its current rating, it would also lose its status as a safe-haven asset,” said Soichiro Mori, manager of foreign-exchange promotion at FXOnline Japan Co. “Foreign investors definitely won’t be motivated to hold such debt.”
The DPJ won power on Aug. 30 by pledging to boost spending and cut taxes, unseating the Liberal Democratic Party, which reigned for all but 10 months since 1955.
Postal Service
Concern about DPJ fiscal policies worsened when Prime Minister Yukio Hatoyama, 62, appointed a former finance ministry civil servant, Jiro Saito, to head the postal service, according to investors such as Makoto Kojima, general manager of global markets at SBI Liquidity Market Co., a unit of financier SBI Holdings Inc. The party vowed to curtail bureaucrats’ power by opposing so-called amakudari, the practice of giving them jobs at state-run companies.
The Nikkei 225 Stock Average has lost 7.4 percent in yen terms since Aug. 28, the trading day before the election, making it one of the six worst performers of 89 primary equity indexes tracked by Bloomberg.
The yen’s value “is not consistent with the underlying fundamentals, and that’s a huge opportunity,” said Michael Hasenstab, who oversees $45 billion in fixed-income assets for Franklin Templeton Investments and is using forward contracts to bet on the yen’s decline. “The yen is very vulnerable.”
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
REMINDER: Emerging Currency Webinar this Thursday
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And to top it off, this Thursday we’re offering a FREE webinar devoted to explaining the nuances of emerging currencies , why it makes sense to devote some capital to this niche market and how you can appropriately get started right away.
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Space is limited. Reserve your Webinar seat now:
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Currency Currents - November 17, 2009
Key News
• Bernanke Signals `Extended Period’ May Be Even Longer as Joblessness Rises (Bloomberg)
• Japan’s Deflation Concern Mounts Even as Economy Expands Most in Two Years (Bloomberg)
Quotable
“The markets are probably going to shrink this year as the numbers tell us. But this is a temporary situation. Because, the crisis does not change Turkey’s dynamics. The banking sector is not very much affected. And if you put all this together, you can see that when there will be stability, Turkey will be one of the countries that will make the biggest leap.”
Mehmet Şimşek
FX Trading – In One Emerging Currency, Volatility Counts for Something …
This isn’t an entirely new idea – we’ve made the connection in Currency Currents before and have since seen it presented elsewhere.
Yesterday the near-term VIX (volatility index) stormed higher and failed to make a legitimate test of support.
As you may or may not be aware, the VIX generally measures investors’ willingness to take on risk. Typically we see greater appetite for risk when volatility is low or falling; and we see less appetite for risk when volatility is high or rising.
This morning, the US dollar is stronger across the board – a sign of waning risk appetite. But this came on the heels of yesterday’s move toward risk. That is, yesterday, despite the volatility we noticed in the near-term VIX above, the US dollar was sharply lower.
So I ask: are we reacting to yesterday’s near-term VIX action?
Perhaps our answer lies with the South African rand …
Of course, it’s still early and today’s USDZAR price could change drastically; but I think you’ll notice a similarity between this chart and the one I showed earlier of the near-term VIX.
The near-term VIX shot up by nearly 12% yesterday; the South African rand has already given up as much as 2% from where it finished up yesterday’s US session.
Now, those moves may not seem comparable, but in the world of currencies – especially emerging currencies – a 2% move in one day is impressive. And it may pay off to keep an eye on this near-term VIX today to see if this move away from risk can be sustained. In such a case the South African rand will likely be among the most pressured of the currencies.
And if you want to take it beyond charts, here are a couple items that could also drive the rand in the near-term …
1) After a weekend meeting, speculation is growing that the powers of South Africa may decide to expand the mandate of the country’s central bank. What might that be? Well it could take the focus of solely combating inflation and give them additional flexibility with policy, being able to react to social issues … with an emphasis on job creation policies. It’s questionable how that might impact the economy, but it would tend to mean less monetary policy pressure driving up the rand.
2) South Africa’s central bank finalizes a two-day policy meetings today where they are expected not to change their benchmark interest rate. With that, attention will be paid to any accompanying announcement or commentary surrounding the analysis and decision from the bank. A stronger South African rand is certainly a concern to an economy still battling recessionary forces.
Clearly the dominant force for the rand has been the risk appetite environment. When risk appetite is strong, the rand is supported; but when risk appetite is weak, the rand struggles with a very shaky fundamental foundation.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
REMINDER: Emerging Currency Webinar this Thursday
We’ve been running a special discounted price on our Emerging Market Currencies newsletter, and that offer expires at the end of this week. You can read more about the newsletter here.
And to top it off, this Thursday we’re offering a FREE webinar devoted to explaining the nuances of emerging currencies , why it makes sense to devote some capital to this niche market and how you can appropriately get started right away.
We hope you can make it!
“Harnessing the Power of Emerging Market Currencies”
Space is limited. Reserve your Webinar seat now:
Please join us this Thursday at 4:30 PM EST
for a complete look at investing in Emerging Market Currencies.
Currency Currents - November 16, 2009
Key News
• China’s Ministry of Commerce said international pressure for appreciation in the yuan was “not fair.” (Bloomberg)
• European consumer prices declined for a fifth month in October as rising unemployment discouraged household spending. (Bloomberg)
Quotable
“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.”
Liu Mingkang, China’s top bank regulator
FX Trading – Triple-think currency payoff?
Describing Russia, Winston Churchill said, “Russia is a riddle wrapped inside a mystery inside an enigma.” I wonder how he would describe modern China; I think it would be fun to hear that quip.
But on second thought, I don’t think we need Churchill for the task, as yet another fine Englishman—George Orwell—summed it up nicely with his definition of Doublethink:
“The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”
[Editor’s Note: A technique utilized by all governments, but seemingly perfected by China.]
Doublethink, I think, perfectly defines Chinese official government policy when it comes to the currency question.
Thought #1: China criticizes the US for trashing the dollar and creating bubbles (rightly so) because of its massive stimulus, stimulus intended to create a modicum of US consumer demand so China has someplace to export all those goods (to reconstitute that symbiotic relationship that created imbalances in the first place). Privately China is banking on the US bubble-making succeeding so the country’s massive over-capacity can be mopped up, instead of going belly up.
Thought #2: China says it’s unfair for others to complain about China’s fixed currency, which is part and parcel to massive bubbles of its own creation (a pegged currency, by definition creates massive liquidity when running a trade surplus; liquidity that can’t escape because of capital controls; thus bubble-ology squared). China actually wants us to believe its fixed currency, in a floating world, actually creates “stability.” Hmmmm…
Some price comparisons are below for you to determine if China’s currency might need to be adjusted, especially given they are growing at close to 10% annualized…a bit higher than the Western world, I would say.
Top Pane: Euro-US$ (purple), Yen-US$ (black); Middle Pane: Aussie-US$ (Red), Brazil-US$ (Green); Bottom Pane: Chinese Yuan-US$ (hot pink)…
Beside the fact the US is implicitly using the dollar as the global whipping boy to boost asset market liquidity (desperately seeking the “wealth effect”, keep in mind the dollar’s level is still determined by the market forces known as supply and demand. We wonder how “fair” the trade competitors with China think it is that China pegs, creating massive liquidity and extreme undervaluation, which acts as a capital magnet when growing at 10% and significant price advantage?
This debate on whether China should revalue has gone beyond farcical. It’s deep into Orwellian territory to even discuss this with the Chinese. But said discussions take place nonetheless, and the Chinese always seem to win thanks to the awesome power of Doublethink. They know Western politicians prefer Pollyanna instead; at least publicly.
China will revalue sooner or later, unless it wants to see a major trade war. It is a war China will lose; though there will be many other country economic casualties along the way. Let’s hope that can be Thought #3 swirling in their heads …
Yes indeed—Triple Think.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Get Your Emerging Markets Fix
All this week Jack and JR will be highlighting emerging markets and their respective currencies.
They plan to offer insight to the global macro perspective that’s driving capital into, or in some cases out of, these lesser-developed nations. They’ll also be offering a look inside some individual nations and their prospects for growth … and the prospects for their currencies. [They will also be examining emerging markets in the November issue of Currency Investor, our monthly service to longer term low-leveraged currency investors.]
This series of emerging market commentary and analysis will culminate in a FREE Emerging Markets Webinar that will be held next Thursday, November 19th. Details on the webinar will be given in upcoming invitation to all Currency Currents readers. Or, feel free to contact us at info@blackswantrading.com for immediate details.
Jack and JR continue to spot excellent investment and trading opportunities in emerging market currencies. We offer a newsletter that expands upon the dynamics of these economies and seeks to exploit opportunities offered by powerful moves in emerging currencies.
Click here to read more if you’re interested in our Emerging Market Currency service.
Thanks again for being a loyal reader,
David Newman
Black Swan Capital
Currency Currents - November 13, 2009
Key News
• Thailand rules out capital controls as baht rises (Reuters via Forbes.com)
• Indonesia central bank wants banks to lower lending rates (Alibaba.com)
• China Q4 GDP growth could hit 10 pct (Reuters via Forbes.com)
• BRDO PRI KRANJU, Slovenia, Nov 13 (Reuters) - Credit activity in the euro zone and globally will remain low because economic recovery is also expected to be slow, Andrej Rant, deputy governor of the Slovenian central bank said on Friday.
“Recovery will be slow in 2010 and if recovery is on the level of 1 to 2 percentage points, it is difficult to expect strong credit activity,” Rant told Reuters in an interview on the sidelines of a banking conference.
Rant, whose governor, Marko Kranjec, sits on the European Central Bank’s Governing Council, said banks were reluctant to extend loans because of high uncertainty on the market and not because they did not have enough money.
“There are no obstacles regarding credits on the supply side, obstacles are on the side of demand because economy is not improving in the way we would want,” Rant said.
Quotable
“QE created a surge in excess reserves: In September 2008, central banks opened up liquidity facilities to alleviate the stress from frozen fixed income markets. These operations resulted in the build-up of ‘excess reserves’ (ER) and an expansion in central banks’ balance sheets. In the past, such a build-up in ER would have been ‘sterilised’ by central banks by selling government securities. This time around, however, that was not done for two reasons. First, we have argued that central banks have pursued QE with the intention of increasing the growth of money, given near-zero policy rates, while more ER would push overnight rates lower. Second, the sheer size of the increase in ER relative to the size of government securities held by or available to the Fed that could be used to drain reserves was at least partly responsible for central banks not being able to drain excess reserves (see Keister & McAndrews (2009), Haubrich & Lindner (2009)). Under these extenuating circumstances, the Fed even turned to the Treasury for assistance and the Supplemental Financing Program was created to help drain ER (see Appendix for details on how the SFP worked and how its wind-down will push up excess reserves).
But why have excess reserves stayed so high? Could be a supply-side issue… Tautologically, commercial banks are holding on to excess reserves because they cannot put the funds to better use. However, this does not help us in identifying whether supply or demand is the source of the problem. While reserves may be higher than required by regulators, banks may not consider them ‘excessive’ in an economic sense, as argued by Friedman and Schwartz (1963). Commercial banks could be hoarding this cash with a ‘precautionary motive’, much as consumers increase savings when uncertainty around their income stream increases. This would be a problem on the supply side of the loanable funds market.”
Manoj Pradhan
FX Trading – Video Edit: The Global Stimulus and Emerging Markets Show
REWIND:
The latest G-20 communiqué said nothing new. You know … where the leaders told us they’re not yet ready to rein in the stimulus they’ve provided to their respective economies.
FAST-FORWARD:
Dominique Strauss-Kahn, head of the International Monetary Fund, is spewing all kinds of commentary this morning.
On one hand, he’s affirming the position taken by the G-20 to remain supportive till a legitimate recovery ensues.
On the other hand he’s stressing the fact that there should be a coordinated effort to peel back stimulus amidst a firm recovery.
Back to the one hand, he admits the global recovery remains fragile.
But back to the other hand, he warns that hot money flowing into emerging markets threatens adverse currency moves and asset bubbles; thus forming exit strategies is necessary.
REWIND:
When the credit crunch hit in earnest, emerging market assets felt severe pain. Stocks were sold off; emerging currencies lost major ground to the US dollar.
The South African rand is one example:
In less than two quarters at the end of 2008 the US dollar skyrocketed while the South African rand lost more than 55%. That’s a monster move in the currency world.
FAST FORWARD:
Since then there’s been a steady sentiment shift back into riskier assets. The rand epitomizes such risky assets and over the last year has erased the losses it suffered.
This is exactly the type of hot money flow that the IMF head hauncho is talking about: “The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges.”
With increasing confidence that the global economy is coming out of the mud, more and more money is moving into these emerging markets and emerging currencies.
PAUSE:
Keep in mind the potential scenarios, and potential risks, we might be dealing with.
Scenario #1: Pull the Stimulus Too Soon
This is probably the biggest concern right now. We continue to see improved numbers on the economic front … in several different regions of the globe. But will national economies be able to sustain the recovery when global policy makers cut them off from stimulus money?
From Reuters:
World Bank Chief Robert Zoellick told the “APEC CEO Summit” that consumer confidence was the key factor in deciding when to hand back to the private sector the primary role for stimulating growth.
“If you look at the U.S. stimulus programme, and many other stimulus packages, a lot of the money actually comes in late 2009, the start of 2010. But the question mark for everybody is whether the private sector will kick in by the middle of 2010 and that is partly an issue of confidence.”
Scenario #2: Keep the Stimulus Coming
Oddly enough, there doesn’t seem to be too much concern with keeping the money taps flowing freely. The most blatant risk seems to be a possible asset bubble from which bursts more pain that a shaky global economy won’t easily be able to handle.
More from the IMF’s Strauss/Kahn:
“While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices.”
“Policymakers should therefore keep supportive measures in place until a recovery is firmly established and conditions for unemployment to recede are in place. In some emerging markets, including a few in Asia, the recovery is further along, and crisis support policies may need to be unwound sooner rather than later.”
PLAY:
Basically, policy-makers are having a sticky time balancing expectations, but boy oh boy are they getting good with the typical economist’s multi-hand approach to markets.
As I see it, policy makers are going to err on the side of stimulus. At this stage in the game an asset bubble does not concern them. An asset bubble may concern market participants, but it does not concern policy makers looking to keep the globe afloat and prevent, at all costs, a double dip.
Get out your oven mitts!
The hot money is going to be around a while longer; but there are going to be some speed bumps getting in the way of these capital flows as we move along.
An area to key on is in the emerging markets – they embody the risk appetite mentality that drives markets right now. Over the next several months we will likely see a continued surge by emerging market currencies relative to the US dollar.
But it won’t be that simple, as concern about stimulus and/or asset bubbles will certainly spark some periods of shakedown.
It’s possible that we see some countries enact capital controls as Brazil and Taiwan.
It’s possible that we see some central banks move toward tightening monetary policy.
It’s possible we see more emerging nations, e.g. Hungary, fail to live up to the stipulations of stimulus loans from the IMF and others.
Just make sure you’ve got your oven mitts on … wouldn’t want you to get burned.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Get Your Emerging Markets Fix
All this week Jack and JR will be highlighting emerging markets and their respective currencies.
They plan to offer insight to the global macro perspective that’s driving capital into, or in some cases out of, these lesser-developed nations. They’ll also be offering a look inside some individual nations and their prospects for growth … and the prospects for their currencies.
This series of emerging market commentary and analysis will culminate in a FREE Emerging Markets Webinar that will be held next Thursday, November 19th. Details on the webinar will be given in upcoming issue of Currency Currents. Or, feel free to contact us at info@blackswantrading.com for immediate details.
Jack and JR continue to spot excellent investment and trading opportunities in emerging market currencies. We offer a newsletter that expands upon the dynamics of these economies and seeks to exploit opportunities offered by powerful moves in emerging currencies.
Click here to read more if you’re interested.
Thanks again for being a loyal reader,
David Newman
Black Swan Capital