Art Cashin: The Clandestine War Among Central Banks

Wednesday, April 18th, 2012

Nothing dramatic here, but the Chairman of the fermentation committee [Cashin] just has that unique flair for explaining things so simply, even an economics Ph.D., a caveman, or the other kind of ‘Chairman’, would understand…

The Not So Clandestine War Among The Central Banks - Back in Philosophy class in the 5th grade, the instructor in Epistemology used to have an interesting parable on problems of perception.

The thesis went something like this: Suppose you are an alien and have been told about the game of chess. Due to a technicality, however, your equipment would only allow you to see one square on the board. Over the course of the game any, or all, the pieces might arrive on your square.

You might see a Knight or a Bishop; a Rook or a Queen or a Pawn, but you would never know where it had come from nor where it had gone when it disappeared. You never got quite enough information to envision the entire board or the concept of the game.

I was reminded of the parable as I have watched the actions of some key central banks over the last few years.

According to the financial media, each central bank is easing aggressively to serve a need of the area it serves.

The Fed is easing to help employment and the housing market in the U.S. The ECB is easing to help it banks, sinking under sovereign debt problems. The People’s Bank of China is easing to avoid a hard landing. The Bank of Japan is easing to restart an economy that has been dormant for two decades.

Those may be the official lines but cynics think there may be more to the game than is seen through this telescope. Cynics think it’s all about the currencies.

The thinking is that each bank would like to see its currency weaken to make its exports more attractive. It doesn’t stop there. With Europe being China’s biggest trade partner, some believe the PBOC is the bid under the Euro at 1:30, keeping the Euro strong enough to make Chinese goods attractive.

The currency influences of the other central banks may be a bit more subtle but no less effective or intense. No trade war yet but lots of drilling and marching.

Actually that is not true. from Mercopress: “US and EU considering WTO actions against Argentine ‘protectionist practices”

The US and forty countries which formalized a joint statement before the World Trade Organization complaining about Argentina’s trade restrictions are considering moving a step further and begin a “disputes settlement” process which could lead to an open condemnation if the administration of President Cristina Kirchner does not lift the protectionist network.

According to Buenos Aires daily Clarin quoting WTO sources in Geneva, “expectations are that it will be the US that presents the “disputes settlement” process since the White House was the main sponsor of the joint statement. The process could end with a formal condemnation of Argentina opening the way for commercial reprisals”.

In the March joint statement presented by the US and forty other leading countries the main complaints against Argentina included the non automatic licences system; the previous sworn statement registry to obtain the approval of an imports operation and the policy forcing companies to apply the ‘dollar-to-dollar’ mechanism which means they have to export a dollar for each dollar import.

Once the disputes settlement begins there is a period of consultations in which in this case Argentina must prove it has not infringed WTO rules, and if no agreement is reached a three member panel is named, chosen by the litigants or WTO Director General Pascal Lamy.

Time for some blogger-cum-budding author (which is about 99% of all) to write a currency wars sequel: Trade Wars: The Final Frontier.

Tags: Art Cashin, Bank Of China, Bank Of Japan, Caveman, Central Banks, Chinese Goods, Clandestine War, Cynics, Debt Problems, ECB, Epistemology, Game Of Chess, Parable, Pboc, Philosophy Class, Problems Of Perception, Rook, Sovereign Debt, Technicality, Trade Partner
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Is China Serious about Currency Reform? (Milton Ezrati)

Wednesday, April 18th, 2012

by Milton Ezrati, Lord Abbett

04.16.2012

Recently, China’s central bank governor, Zhou Xiaochuan, made comments that drew less attention than they deserve. First, he suggested that market forces would play a bigger role in setting the value of China’s currency, the yuan (or renminbi). He also mused that the yuan should rise further against the dollar and on foreign exchange markets generally. An announcement Saturday, April 14, by the People’s Bank of China relating to increased flexibility in the trading band of the currency would appear to confirm Zhou’s serious intent. There is room for two responses to this seemingly new Chinese positioning, one cynical and the other much more positive and hopeful.

On the cynical side, there is history. China has long strived to promote its exports by keeping its yuan cheap to the dollar and other major currencies. The global pricing advantage this policy has given Chinese goods has enabled the country famously to raise its share of global exports from nearly zero in the early 1990s, when it initiated the policy, to upwards of 12% more recently. The accompanying business and employment opportunities have propelled China to enviable aggregate growth rates throughout this time.

For these two-plus decades, China’s relentless adherence to this policy has led Beijing to resist all pressure for yuan appreciation, whether from by the United States, the European Union, or others. Beijing’s leadership set the tone in the early 1990s. In 1993, when under secretary of the Treasury, Larry Summers, demanded currency revaluation on behalf of President Clinton, Beijing, far from bowing, devalued the yuan within six months, and by a massive 60%. It then locked in the currency at that cheap price against the dollar. The move undercut pricing in most of the rest of Asia and ultimately contributed to the Asian crisis of 1997–98, referred to more commonly as the “Asian Contagion.” It was not until 2005 that Beijing allowed some upward movement in the yuan’s foreign-exchange value, and even then it kept tight control, allowing only frustratingly slow and slight appreciation.

Such a backdrop makes it easy to dismiss Governor Zhou’s comments as just so much rhetoric. After two decades of tight control, it is hard indeed to see China accepting much market influence on its currency. And since the yuan today remains 11% cheaper against the dollar than it was before China’s first grand devaluation, Governor Zhou’s speculation about whether market forces might raise its value further looks less insightful than obvious. The yuan’s modest depreciation so far this year raises still more questions about such a market-oriented commitment. Of course, market forces always move in uneven patterns, but it is nonetheless suspicious that, in 2010 and 2011, when Beijing aimed to slow the country’s growth rate, the yuan appreciated gradually, in its usual controlled way, but now that Beijing wants to promote growth, it has suddenly gone the other way. The pattern certainly speaks less to market forces than to Beijing’s usual currency management.

Still, cynicism aside, Governor Zhou’s comments may also contain a more positive, forward-looking aspect. Most encouraging is the link he made between the yuan’s value and China’s now-clear efforts at internal development. Beijing has come to recognize the vulnerabilities of export-oriented growth policy, especially during the 2008–09 global recession. Accordingly, it has begun to think increasingly about internal development as a second engine of growth, but also as a way to spread the benefits of economic development and avoid social unrest. As papers posted on China’s central bank and other government websites also make clear, Beijing realizes that the country cannot expect to increase its global export share over the next 20 years at the same rate it has in the past. China’s great success with its 2008 stimulus package has further encouraged the domestic development decision by proving the huge potential returns it offers. But Governor Zhou’s remarks are the first time Chinese officials have publically recognized that the shift requires a rise in the yuan’s foreign-exchange value.

Matters surely will unfold slowly. For the sake of jobs and incomes, China will continue to support its exports until it has achieved a critical mass of internal development, including a broader consumer sector, to support aggregate growth. But the governor’s comments should build conviction here in the United States and elsewhere in the world that China clearly plans to move along this path. Because broad-based domestic development will have more difficulty than exports in generating rapid growth, the picture offers reason to expect that China will exhibit slower growth going forward than it has in the past. But at the same time, the prospect promises increased opportunities for producers in the United States and elsewhere in the world to sell into a growing domestic Chinese market. It also promises that, in time, global trade patterns will find relief from the imbalances previously imposed by China’s once single-minded focus on exports.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

Copyright © Lord Abbett

Tags: Aggregate Growth, Asian Contagion, Asian Crisis, Bank Of China, Central Bank Governor, Chinese Goods, Currency Reform, Currency Revaluation, Cynical Side, Foreign Exchange Markets, Global Exports, History China, Larry Summers, Lord Abbett, Milton Ezrati, S Central, Secretary Of The Treasury, Serious Intent, Yuan, Zhou Xiaochuan
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Jim Rogers Talks to CNBC About the Current Dire Straits

Saturday, September 24th, 2011

by Trader Mark, Fund My Mutual Fund

Sometimes Jim Rogers gets repetative since he usually pounds the same theories – which is not bad from the viewpoint he has a long term outlook, but in this interview with CNBC yesterday there are some interesting items regarding his current positions (currently long dollar even though he does not believe it to be a safe haven), and some trade / currency tensions developing.  I must have missed the news about Brazilian import tariff on Chinese goods.

For those newer to trading I think his view on the dollar is important to understand from a lesson standpoint.  Even if you the dollar is ‘cooked’ long term, time frame is important.  For the near term, the U.S. dollar still is considered a safe haven (best house on a street full of crack homes) and in panic people flee to U.S. Treasuries and the dollar.  So while Jim believes U.S. leadership (I use that word loosely) is constantly doing damage to its currency, he understands the way the other people in the market will react and will take advantage of it.  (Rogers is a huge long term bear on the currency)

8 minute video

• The U.S. dollar is going higher “against major currencies,” well-known investor Jim Rogers told CNBC Thursday. The dollar “is going up against everything right now” for a number of reasons, said Rogers. One may be that everybody is panicking “and for some reason they’re rushing into the U.S. dollar.” “The U.S. dollar is not a safe haven, if you ask me, but I do own it,” he added.
• Also, Rogers noted he would own the U.S. dollar, or the Swiss Franc, or agriculture. “Agriculture prices [are] getting banged right now. I am kind of planning on buying Swiss francs, more dollars and agriculture.”
• In addition, he weighed in on China’s economy, saying, “They’re doing their best to cool things off … I expect them to continue to do it, and that is causing more slowdown around the world.”
• But “the major problems are coming from the west,” Roger stressed. “They are coming from Europe and the [United States]. We are much worse off than we were in 2008 because the debt has gone through the roof.”  “At least in 2008 there was the possibility that the governments could bail us out. Now, of course, the governments have gotten deep, deep, deep into debt themselves,” he added. “Everybody is in much worse shape.”
• Plus, there are all sorts of trade tensions and currency tension developing, Rogers went on to say. “Brazil  is sort of ignited a trade war [by putting a 30 percent import tariff on China and Korea ]. And right now China is trying to get the Europeans to let them open up the trade with China more. The Europeans are saying no, so China is saying, ‘No, we won’t bail you out.’”
• “I hope the trade war doesn’t break out” because throughout history when it does it has “caused depressions,” Rogers added. “You saw what happened in the 1930s. It led to depression and it also led to war. So I hope it can be contained.”
• Ben Bernanke’s idea that low-interest rates are good, “is killing the people who save and invest, and that’s really hurting a very, very large part of the population,” concluded Rogers. (something we’ve said countless times)  [Mar 31, 2010: Ben Bernanke Content to Sacrifice Savers to Recapitalize Banks and Benefit Debtors]

Tags: Agriculture Agriculture, Agriculture Prices, Brazil, Chinese Goods, Cnbc, Currency, Dire Straits, Import Tariff, Jim Rogers, Mutual Fund, Outlook, Safe Haven, Slowdown, Standpoint, Swiss Franc, Swiss Francs, Tensions, Term Outlook, Term Time, Time Frame, Treasuries, Viewpoint
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China’s Foreign Exchange Reserves Jump by Record $199 Billion; Cost Push Inflation from China? Don’t Count On It!

Thursday, January 13th, 2011

by Mike “Mish” Shedlock, Global Economic Trends Analysis

Inflation is officially running in China at 5%. Unofficially, estimates are 10% or more. Is it just a matter of time before these costs get passed through?

The New York Times article Rising Chinese Inflation to Show Up in U.S. Imports suggests just that.

When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock.

“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

While American importers of Chinese goods will feel the squeeze, the effect on American consumers may be more subtle and the overall impact on United States inflation may be minimal.

There are simply too many other markups along the way — from transportation to salesclerks’ wages — that affect the American retail prices of Chinese-made products. Excluding those markups, imports from China are equal to little more than 2 percent of the overall American economy.

The bigger consumer impact is in China itself. As China’s booming economy enables more of its own citizens to buy the goods pouring out of its factories, Chinese consumers are feeling inflation directly. And Beijing is increasingly worried about the social unrest that could result.

In China, consumer prices were 5.1 percent higher in November than a year earlier, according to official government data. And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high.

Hu Xingdou, an economist at the Beijing Institute of Technology, said that a more accurate gauge of inflation would show consumer prices rising 10 percent a year. The National Bureau of Statistics has said it is actively studying ways to improve the consumer price index.

Inflation in China is not just the result of China’s currency market intervention, although Mr. Hu and other economists describe it as the biggest single cause. Another cause is aggressive lending by Chinese banks, despite repeated demands by regulators to slow things down.

And globally, strong demand from consumers in China and other emerging economies is pushing up not only gasoline prices, but also the prices of cashmere, rabbit fur, cotton, copper and many other commodities.

After showing little change for nearly two years, import prices for goods arriving from China at American docks rose from September to November at a rate equivalent to an annual rise of 3.6 percent.

In another indicator that the Chinese central bank released Tuesday, China’s foreign reserves leaped by $199 billion in the fourth quarter. The increase was much larger than economists had expected, and they suggested that China had roughly doubled its intervention in currency markets to around $2 billion a day.

Where’s The Pass Through?

A couple months ago I had a cotton buyer tell me that prices of garments in the US would soar in 2011 because cotton prices are up 35 percent. Actually, cotton futures are up 100% in a year as the following chart shows.

Cotton Weekly Chart

This year, futures (raw cotton) prices are up 100%, and the buyer’s price of cotton is up 35%.

From September to November, the price of goods from China in general rose at an annual rate of at a rate of 3.6 percent. How much of that price will make it to the stores? More importantly, how much of the commodity price pressures will make it to the stores in 2011?

Clearly it’s a guess, but let’s take a look at soaring food prices, something less elastic than apparel prices.

Soybean Weekly Chart

Soybeans did not exceed the 2008 high but are up substantially since early 2010. The same holds true for corn.

Corn Weekly Chart

Live Cattle Weekly Chart

Live cattle prices have taken out the 2008 high and lean hog futures matched the the 2008 highs. Both futures are up substantially on the year. Yet I have seen virtually no passthrough on meat prices at the stores.

In fact, I have not seen any hike in meat prices for at least 5 years and I do 90% of our grocery shopping.

Tags: Accurate Gauge, American Consumers, American Economy, American Importers, Beijing Institute Of Technology, Chinese Consumers, Chinese Goods, Commodities, Consumer Impact, Currency, Designer Clothing, Emerging Markets, Foreign Exchange Reserves, Fur Coats, Garment Buyers, Global Economic Trends, Government Data, India, Markups, Mish Shedlock, Rate Of Inflation, Social Unrest, Sticker Shock, York Times Article
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Emerging Markets Diary (August 16, 2010)

Saturday, August 14th, 2010

Emerging Markets Diary (August 16, 2010)

Strengths

• China’s exports rose 38.1 percent from a year ago to a record of $145.5 billion in July as economic fears in Europe and the U.S. failed to reach China. The higher-than-expected rise contributed to the $28.7 billion trade surplus.
• China’s Ministry of Finance announced that total healthcare budget will grow 14 percent from the previous year in 2010 to $65.3 billion. The figure rose 9 percent in 2009.
• Thailand’s consumer confidence increased for a third consecutive month to 71.4 in July.
• Hong Kong’s GDP expanded by a higher-than-expected 6.5 percent during the second quarter from a year earlier, driven by robust re-exports of Chinese goods, strong business investment and rising Chinese tourists.
• Brazilian toll road operator CCR (Companhia de Concessoes Rodoviarias) reported strong results with EBITDA (earnings before interest, taxes, depreciation and amortization) rising 19 percent year-over-year. Traffic grew 12 percent with the rebound of economy.
• The mending of relations between Colombia and Venezuela should be well received by market participants. The two countries are closely linked economically despite differences in political paradigms.
• Chilean airline LAN posted a 15 percent increase in traffic in June.
• Industrial Production in Mexico grew by 8.4 percent in June, led by a pick-up in manufacturing (up 15.2 percent) and mining (up 4.9 percent). Auto exports to the U.S. were the main driver of the pick up in manufacturing activity. Economists expect a 4 percent growth in GDP this year.
• Isbank’s net profit in the first half grew by 31 percent as Turkish consumers took advantage of low borrowing rates. Despite the increase, we expect a reduction in net interest margins for Isbank and all Turkish banks this year due to repricing of assets and liabilities. However, higher volume of lending should still lead to a growth in net interest income.
• Traffic on Turkish airlines grew by 20 percent during the first half of the year. More importantly, the load factor—a measure of how much of an airline’s passenger carrying capacity is used—rose to 73.4 percent.

Weaknesses

• China’s imports rose by a much lower-than-expected 22.7 percent in July from a year earlier, as both processing imports and commodity imports decelerated. Weaker demand is also reflected in lower than estimated year-over- year growth in industrial production at 13.4 percent and retail sales at 17.9 percent. The RMB 533 billion new bank lending and 17.6 percent growth in M2 money supply also trailed expectations.
• South Korea’s unemployment rate rose for a third-straight month to 3.7 percent in July, as the government withdrew some of the countercyclical policies to support job creation after the global recession started.
• Malaysia’s industrial production expanded by a slower-than-expected 9.4 percent in June, the fourth-straight drop in year-over-year growth. This is consistent with decelerating exports driven by European debt crisis and a slowing U.S. recovery.
• Singapore’s retail sales declined 4.9 percent year-over-year in June as car sales continued to contract and growth of spending on small ticket items slowed as well.
• The uncertainty for the three Mexican airport groups intensified with the bankruptcy of Mexicana, the largest airline in Mexico. In addition, Macquarie’s sale of its 16 percent stake in ASUR put the stock under pressure the last few days. This was exacerbated by ASUR’s weight reduction in Mexico’s Bolsa Index.

Opportunities

• According to Credit Suisse, Chinese households’ grey income (income unreported to the state) added up to 9.3 trillion yuan ($1.4 trillion) as of 2008, or around 30 percent of GDP. Around 81.3 percent of this unreported pool belonging to the top 20 percent of earning households.
• With harsh domestic policies on real estate and substantial uncertainties in the stock market, Macau’s gaming sector could continue to benefit from mainland Chinese liquidity as a result of growing income, both reported and unreported.
• While it is still unclear if the proposed transaction between Vimpelcom and Orascom Telecom will take place, the combined company would be one of the largest in the European emerging markets universe. However, various regulatory bodies and minorities’ interests would have to be resolved before benefits of consolidation would kick in.
• Banco do Brasil, Bradesco and Banco Espirito Santo (Portugal) signed a non-binding memorandum of understanding to create a holding company to operate in Africa. The proposed entity would be a vehicle for future acquisition in Africa.

Threats

• Hong Kong’s newly announced property tightening measures, such as increasing land supply, raising the minimum down payment to 40 percent from 30 percent for higher-end and investment properties, and asking banks to conduct stress tests, may weigh on Hong Kong real estate companies.
• Although the presidential election in Mexico is still two years away, controversial left-wing candidate Mr. Lopez Obrador, who narrowly lost the last election, has already launched his campaign.

Tags: Assets And Liabilities, Auto Exports, Brazil, Business Investment, Chilean Airline, China, Chinese Goods, Chinese Tourists, Consumer Confidence, Emerging Markets, Healthcare Budget, Interest Income, Interest Margins, Isbank, Market Participants, Ministry Of Finance, Net Interest, Paradigms, Toll Road, Trade Surplus, Turkish Airlines, Turkish Banks
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China Helps Itself, No One Else (John Taylor)

Saturday, July 10th, 2010

China Helps Itself, No One Else

By John Taylor, CIO, F/X Concepts, via ZeroHedge.com.

When China announced that it would be changing the policy that effectively fixed the dollar rate in the 6.83 area since August 2008 and would allow the daily peg to move significantly as it had in the 37 months between July 2005 and August 2008, there was joy in the major political capitals. Western observers saw the Chinese move as a conciliatory gesture to the Eurozone, and especially to the US, that would ease global political stresses at the upcoming G-20 meetings. Although political tempers were cooled somewhat in Toronto, the Chinese move will have virtually no impact on the trade balance and employment picture in any of the developed countries and, as a result, will not lessen the political heat that the Western authorities are facing from their electorates. Within Europe, the powerful German export machine masks Chinese import penetration and mutes the public’s anger, as there are so many other economic issues agitating the voters, but in the US, the trade deficit with China stands clearly above any other global economic issue. Despite the hoopla around this move, it will have almost no impact on US imports of Chinese goods, or the US trade balance. Has this change done anything?

From the US point of view, the renminbi–dollar exchange rate sounds important, but it isn’t. Even if the renminbi were to double in value tomorrow, and the Chinese lost market share in a market, like televisions, the US would import many fewer from China, but would buy more from other countries like Malaysia or Thailand. In almost every case, the lowest cost producer would not be an American manufacturer but another foreign one. In fact, it is very likely that the Chinese would not be pushed aside by others even if its currency does strengthen dramatically. The Japanese example is instructive: there were 360 yen per dollar in 1972 and now almost 40 years later there are about 88, which is roughly a 4% compound rate of annual appreciation, but the Japanese maintained their dominant trade surplus with the US throughout the entire process. China’s surplus is higher than it was in 2005. In the 59 months since the renminbi began its climb from 8.255 RMB per dollar, it has appreciated at roughly the same annual rate as the yen, but the impact of this annual change is almost nil. On each individual item, like a pair of $10.00 jeans, an increase of 4% is only $0.40, an amount that can be covered by squeezing the margin either at the manufacturing end or at the wholesale/retail end. There is plenty of room to accommodate this increase; the customer sees nothing and he keeps on buying.

For the Chinese, restarting the creeping revaluation of the renminbi has many benefits. Near the top of the list is gently moving its manufacturing base toward higher value added items and shifting production from servicing exports to satisfying domestic demand. Way down the list is appeasing the international critics of Chinese policy. The promotion of the domestic market is already underway, but the pace will be glacial – at least from the point of view of bank traders and US politicians – taking at least a decade to have a major impact on the composition of the Chinese economy. And there is no guarantee that any shift is coming, as the Japanese economy remains basically unchanged despite the dramatic increase in the value of the yen. We can only hope that the authorities in Beijing have a more adaptive and global view than those in Tokyo have shown and will adjust their banking and financial support system to integrate the renminbi and the Chinese economy with that of the West. Although the renminbi could rise to the 4.00 area by the end of this decade, the impact of this move will be felt inside of China, not outside. Furthermore, we can be sure that the Chinese leadership will do its best to manage this process in a way that has the most positive feedback for the Chinese society. Although the stronger renminbi will be a boon for China’s neighbors in Asia, it offers no help to the US or Europe.

Source: ZeroHedge.com

[PDF]

Tags: American Manufacturer, Capitals, China, Chinese Goods, Chinese Import, Developed Countries, Dollar Exchange Rate, Dollar Rate, Economic Issue, Economic Issues, Electorates, Eurozone, German Export, Hoopla, Import Penetration, Japanese Example, Political Heat, Tempers, Trade Deficit With China, Us Trade Balance, Western Observers, Yen Dollar
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