Currency Currents - January 14, 2010
Key News
• Shanghai overtook Tokyo as Asia’s biggest stock market by trading value last year, as an 80 percent jump in China’s benchmark index boosted equities demand. (Bloomberg)
• [Japan]: Orders from non-manufactures dropped 10.6 percent to 380.7 billion yen ($4.15 billion), the lowest since May 1987, the Cabinet Office said today in Tokyo. (Bloomberg)
• Australian employment soared for a fourth straight month. The number of people employed gained 35,200 in December from November, the statistics bureau said in Sydney today. The jobless rate fell to 5.5 percent from a revised 5.6 percent. (Bloomberg)
Webinar: Currency Trade Setups for Major Pairs and Emerging Markets to Start 2010
Date: Thursday, January 14th, 2010
Time: 3:30 p.m. CST (4:30 p.m. EST)
Speakers: Jack Crooks, Black Swan Capital
This webinar event takes an in-depth look at the key fundamentals and technical rationales for why the US dollar has bottomed. In addition, Jack will outline the best intermediate-term trade setups for major pairs and emerging market currencies.
Click here to register for this event at Trader Kingdom …
Maybe Google Knows Something….
Notes from the 2009 Central Propaganda Department in China:
C. Currently, our country’s main internal contradictions (conflicts) are:
i. Mass incidents caused by changes in businesses.
ii. Problems with ex-members of the armed forces. The central government requests: they must be well taken care of, every effort must be made to resolve their difficulties, and it is necessary to prevent them from being used by hostile forces.
iii. Irregularly petitioning for redress. It is the right of citizens to petition higher levels of government; however, using irregular means of petitioning for redress influences social stability.
iv. Large scale mass incidents caused by demolitions and the taking of rural land.
v. Large scale mass incidents caused by serious criminal activity. For example, multi-level marketing schemes and illegal fundraising.
D. The challenges to social stability brought by the widespread use of the internet.
Source: China Digital Times http://chinadigitaltimes.net/china/social-unrest/
“Furthermore, despite optimistic projections of China’s future growth potential, its economy is still beset by numerous imbalances and risks in the medium term. These include persistent and even widening regional economic disparity and rural-urban income inequality, rising social unrest and inter-ethnic conflicts, rampant corruption, and serious economic degradation. An eruption of any or several of these ‘fault lines’ could put a sharp brake on the ascent of the Chinese economy, and as the same time propel the renminibi onto an inordinately volatile trajectory.”
Friedrich Wu, Professor at Nanyang Technological University in Singapore
“Asia is leading the world out of global recession, but the financial crisis may yet have a dangerous sting in the tail – the risk of social unrest as unemployment and inequality rise even as economies recover.
“Fears of widespread unrest last year failed to materialize, and most Asian economies are now posting impressive growth. But unemployment is a lagging indicator, and many political risk consultancies are warning that 2010 may hold nasty surprises.
“’Although we maintain that the crisis has already inflicted its deepest wounds, its impact will continue to be felt throughout 2010,’ the Economist Intelligence Unit said in a report.
“The main downside risks to economic stability this year include asset price bubbles, deflationary pressures, and the danger of ‘an increase in the frequency and intensity of social and political unrest, given increased unemployment, weak growth and impending fiscal austerity measures in many countries,’ the EIU said.
“Much of the risk is concentrated in Asia.
“The EIU rates China in the ‘high risk’ category for social unrest in 2010, upgraded from ‘moderate’ risk in 2009. Also in the high risk category are Thailand, Indonesia, the Philippines, Sri Lanka, Cambodia, Bangladesh and North Korea.”
Andrew Marshall, Reuters
“Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as ‘stir fried’ markets.
“…Just take a look at China’s ten largest companies which are all state-owned or state-controlled, as are thirty-four of the top thirty-five companies listed on the Shanghai exchange.”
Carl Delfeld, President of Chartwell Partners
“There has been some hope that boosting trade with developing countries, and especially with developing Asia, will result in a new source of net demand. James Kynge said something like this in the Financial Times earlier this week:
Popular narratives sometimes overshoot. One of the latest to outlast its veracity is the conventional wisdom that China’s export engines have been spiked by subsiding consumer demand in the US. This, so the argument goes, leaves Beijing with no option but to spur domestic demand to compensate for lost export revenues.
This became an über-narrative last year. Its snowballing popular appeal was powered by two unassailable charms: it made sense and seemed largely true – but not any longer. Its potency appears set to wane in coming months not so much because of a challenge to its central plot, but by other things happening off stage.
The telling off-stage action is the recent upsurge in trade with south-east Asia and the “newly-rising economies” of Brazil, Africa and India. Although Chinese trade with these places has historically been limited, it has grown so fast in the past five years that a robust performance in 2010 may be enough to offset any moderate weakness in China’s trade with the US.
“A friend wrote to me to ask what I thought of this possibility, citing Kynge’s article, and my response (with some editing) was:
“The idea that net demand from developing countries can replace net demand from the US is alarmingly widespread, both in China and abroad, and mainly indicates to me a lack of familiarity with the history of developing countries. The developing world excluding China is roughly the same size as the US, so if you want them to replace the US you need the developing world to run trade deficits of roughly equal to 7% of their GDPs.
“Leave aside the huge problem that most developing countries also want trade surpluses and have a stubbornly tough time understanding why they should run deficits in order to help Chinese employment, the historical evidence suggests that just a few years of trade deficits of 2% of GDP will lead to external debt crisis. For example it took the Asian Tigers just a few years of deficits after 1993-94 to run into the Asian crisis. Do Malaysia, Indonesia, Vietnam and so on really want to go through that again? Developing country demand cannot replace the US. Even Europe cannot replace the US. This is an unrealistic hope.”
Michael Pettis, Professor at Peking University
FX Trading – Party on dudes…
Question: Is it a Black Swan event when so many people are already talking about it? No, but the China cheerleaders will say it is so…
DJ Shanghai Stock Index Weekly: Divergence? Stay tuned.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Note from David Newman …
2010 Forecast Issue coming this month … 20+ pages of analysis and charts covering the major and emerging market currency world—key themes and targets.
Currency Investor presents its annual 2010 Forecast for the coming year. Don’t miss this issue as it may be the most important one we write all year.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
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 sign up …
Thank you.
All the best,
David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Currency Currents - January 13, 2010
Key News
• BEIJING, Jan 12 (Reuters) - China took its strongest step towards tightening monetary policy on Tuesday as the world’s third-largest economy roars ahead, surprising investors with an increase in banks’ required reserves that rocked global financial markets.
• Greece condemned for falsifying data (Financial Times)
• Insight: Lift rates and think about the savers (Financial Times)
Webinar: Currency Trade Setups for Major Pairs and Emerging Markets to Start 2010
Date: Thursday, January 14th, 2010
Time: 3:30 p.m. CST (4:30 p.m. EST)
Speakers: Jack Crooks, Black Swan Capital
This webinar event takes an in-depth look at the key fundamentals and technical rationales for why the US dollar has bottomed. In addition, Jack will outline the best intermediate-term trade setups for major pairs and emerging market currencies.
Click here to register for this event at Trader Kingdom …
Quotable
“Meanwhile, the rest of the world has to wonder whether it is learning the lessons from Japan’s fall from economic grace. Japan’s experience strongly suggests that even sustained fiscal deficits, zero interest rates and quantitative easing will not lead to soaring inflation in post-bubble economies suffering from excess capacity and a balance-sheet overhang, such as the US. It also suggests that unwinding from such excesses is a long-term process.
“Yet Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China.”
Martin Wolf, Financial Times
FX Trading – Lessons to be learned.
Martin Wolf of the Financial Times (quoted above) brings back the common comparison to Japan’s lost decade … in hopes of conveying the similarities between Japan then and the US now.
Yes, the comparison is not new. Several months ago in an issue of The International Economy magazine, I read several responses from economic minds across the globe to the question: Will the US suffer a lost decade?
But even many months before that, when deleveraging dominated markets, the idea had begun circulating. Admittedly, deflation was a bigger concern on the minds of investors one year ago relative to today. Maybe, though, we shouldn’t shrug off the Japan scenario just yet.
On Monday I mentioned attending a discussion on economics and markets hosted by CB3 Financial Group. One of the other attendees mentioned a recent guest on PBS News Hour with Jim Lehrer. The guest basically talked about how the financial system was getting back to business as usual.
And in this case “business as usual” did not mean operating efficiency or normalization, per se, but rather back to the old practices that got everyone into trouble in the first place. You know: the type of stuff that’s prompted cries of much-needed financial regulation.
Robert Reich seems to agree. This article from the Financial Times is making a similar case for financial regulation, suggesting the government needs to come down hard on Wall Street.
Now, are we really that unstable in this nascent, market-led recovery? Well, it’s obvious the economy has not come as far along as the markets. Let’s think about that. Something comes to mind …
Heavy on the newswires today is talk about how the Obama administration plans to slap a $120 billion fee on TARP-assisted companies. Yeah, the whole mess is too ridiculous to even want to discuss in full. I’ll try to lay out the ideas real quick:
- The government took steps to keep the banks from failing
- The public mostly opposed the TARP
- The government talked up the need, and eventual “success”, of TARP
- The public became sick over resurgent banker bonuses
- The TARP will actually turn a loss
- The government must levy a fee to recoup some of the taxpayer-funded bailout
Ok, somewhere along the line the market became reassured that this is a decent enough attempt at fixing the problems and enough of a reason to buy bank stocks. What’s ensued since has been a solid-looking recovery for the stock markets.
Dow Jones Bank Stock Index (black) vs. S&P 500 Index (red) Daily: Bank index is now underperforming S&P after leading for many months.
A disconnect between the economy and the market has become obvious, no doubt. Now the big question: how shall the two reunite?
It seems there are two general answers:
1) The economy plays catch-up.
2) The market takes a double-dip.
I’d say the majority is currently betting on numero uno. But if there’s really a risk of a lost decade in the US, or if there’s really a risk that the financial system is just building itself back up for an encore collapse, then maybe the market does a rethink.
The pressure would really be on China to keep the rest of the world from going belly up. Like Mr. Wolf says, perhaps China, too, can learn a lesson from Japan.
It’s like déjà vu all over again.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Note from David Newman …
2010 Forecast Issue coming this month … 20+ pages of analysis and charts covering the major and emerging market currency world—key themes and targets.
Currency Investor presents its annual 2010 Forecast for the coming year. Don’t miss this issue as it may be the most important one we write all year.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
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 sign up …
Thank you.
All the best,
David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
Phone: 866-846-2672
Currency Currents - January 12, 2009
Key News
• China raised the proportion of deposits that banks must set aside as reserves. (Bloomberg)
• Carlyle Group unveiled plans to work with city authorities in Beijing to establish a renminbi fund that will enable it to make local currency investments across China.(FT)
• An International Monetary Fund (IMF) stand-by deal with Turkey would help reduce the Treasury’s debt rollover ratios and protect the country against future shocks, Finance Minister Mehmet Simsek told Reuters. (Reuters)
• The balance of Japanese bank lending fell from a year earlier in December for the first time in four years as companies remained sceptical about the economic outlook and wary of borrowing to expand their business. (Reuters)
• Heavily dependent upon hard-to-get bank loans and shut out of Europe’s embryonic corporate-bond market, small and medium businesses here have been hit hard. The result: widespread insolvencies, job losses and a cloud over Europe’s growth prospects in 2010. (WSJ)
• The dollar edged higher on Tuesday, after an official from a Chinese sovereign wealth fund said he did not think the greenback would depreciate much further.
Quotable
“As always, companies and investment banks have no trouble in meeting the new demand. Emerging market IPOs have been running at double the cash value of developed market IPOs, despite the much smaller market scale.
What’s wrong with this picture? Plenty. Academic studies have shown there is no positive correlation between GDP growth and stock market returns – if anything the correlation is slightly negative. Professor Jay Ritter of the University of Florida is the author of one such study ranging over a hundred years of data from sixteen different countries. His conclusion is clear: “Countries with high growth potential do not offer good investment opportunities unless valuations are low.”
The reason for this counter-intuitive finding is that you do not buy shares in the statistical construct known as GDP. You buy the shares of real world companies. In immature fast-growing economies, the companies that end up winning the struggle for survival may not even exist yet. That was certainly so in the case of Japan’s economic miracle. In the 1950s there were more than one hundred motorbike companies. The market leader, Tohatsu, was driven out of business by the cut-throat pricing of a flaky upstart called Honda.”
Peter Tasker
FX Trading – Complacency vs. Risk Aversion Probabilities Seemingly Rising
This morning, writing in the Financial Times, long-time Asian market seer and excellent analyst/writer Peter Tasker tells us most emerging markets are looking dicey, given the overvaluation. The biggest problem flows from the biggest one—China, according to Tasker.
Early last week, emerging markets guru (well deserved we might add for his excellent work over the years) Mark Mobius sounding a similar warning, suggesting EM equities were overdone and the rush of IPOs was not good.
This morning China decided to raise reserve requirements on its banks, hinting of bubbulicioness concerns. Back to Mr. Tasker [our emphasis]:
“So are valuations low enough in the emerging markets to offer good investment opportunities? In less popular areas, perhaps yes. But the bigggest of them all, China, is in a bubble phase. At its 2007 peak, the Shanghai A-share index traded at over 7 times book value, far above the 5 times reached by Japan’s Nikkei Index at its peak twenty years ago.
“Having subsequently halved, Chinese stocks are no longer quite so expensive. However the adjusted ‘Graham-and-Dodds’ price-to-earnings ratio – a time-tested indicator of value which uses an average of ten years earnings – remains at a dizzying 50 times. Compare that with around 15 times in the US, itself by no means cheap in historical terms.
“Residential real estate [in China] appears to be even more overvalued. In bubble-era Japan, a byword for manic real estate speculation, apartment prices peaked out at 12 to 15 times average household income. In major Chinese cities, the multiple is currently 15 to 20 times. Asset market bubbles of any scale and duration usually have their equivalents in the real economy. The biggest distortion in the Chinese economy is the explosion in fixed asset investment to an eye-popping 50 per cent of GDP. By comparison, Japan in its miracle decade clocked up economic growth rates similar to China’s today by investing between 30 per cent and 35 per cent of its GDP.
“Just as there has never been a bubble that hasn’t burst in the end, so there has never been an investment boom that hasn’t been followed by a bust. If China’s investment-to-GDP ratio were to drop to the levels of 1960s Japan – not an absurd idea, since that is also where it was in China ten years ago – the impact would be catastrophic. China itself would face slump and the mother of all banking crises. A domino reaction would hit the commodity exporters and other emerging economies. The deflationary impact of Chinese overcapacity would be felt everywhere, potentially putting the world trading system at risk. And investors would come to view the ‘Bric’ acronym much as they do ;TMT’ today.”
The problem is, betting against a Chinese bust hasn’t been a very profitable thing to do. Like those of us who watched the Nasdaq boom in the late ‘90’s; fading that trend proved consistently deadly even though we knew it would end badly—when it would end was the little wrinkle few figured out. Ditto China. But it could be a mother of a bubble burst when it does. Rising interest rates at the margin, as I talked about recently, have been the catalyst for things like that in the past.
What could keep the music playing longer than expected now, despite rising bond yields? Hot money flowing into China in expectation of some type of one-off revaluation of the currency—yuan (or the even harder to pronounce and spell Remnimbi). But we’ve seen this game before also. We’ve seen plenty of unsuspecting investors sucked into the “exciting” Chinese yuan deposits in expectation of revaluation by questionable institutions extolling said virtues, even though it has proved to be dead money for years as the interest paid is miniscule or zip—fees paid to the institutions by investors are a bit higher, however. No names mentioned in order to protect the guilty.
Maybe its part and parcel to “a firm that never met a politician who couldn’t help jockey it closer to power interests,” aka the Carlyle Group’s decision to pony up closer to China with its new obviously well-connected local currency investment fund. Here’s to hoping Carlyle’s timing is about as good as Blackstone’s venture into real estate; them having taken it off the hands of rich old Sam Zell just in time. Sorry. I should stop wishing bad things for seemingly questionable people. My apologies! It’s yet another New Year’s resolution already gone bad…
To use JR’s title from yesterday, everything is looking hunky dory, the S&P and evaporating volatility is telling us things are indeed hunky dory. Take a look at this picture we shared with our Members yesterday:
You notice the breakout in SPU (black line) from that wedge…just above the 50% retracement level from the pre-credit crunch high to the post-credit crunch low. VIX (red line) is testing its old lows. Extended? We think so!
Complacency rules! And so far it has been very right. But then again nothing new here; very happy campers are the prelude to very frightened campers. It is the way the market is and the way the market has to be. The Tao of markets! I stole that from a man who has forgotten more about currencies and markets than most will ever know, John Percival of the venerable Currency Bulletin. Thanks John for all the wisdom you have shared for many years.
So the currency play that might lead, or at least accompany, a pack of frightened campers out of stocks, here there and everywhere, is likely the EUR-JPY pair; or is it the AUD-JPY pair, or is it….
EUR-JPY (black) vs. S&P 500 Index (red): Is there a bit of divergence there? It does appear so.
Stay tuned.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com