Tag Archives: Dollar

Trumponomics is About to go Global

The critics were wrong and we know this now. On election market futures tanked on the hint that Clinton would lose and Trump might win. They and their pundits assumes that mediocrity and continuation of the Obama polices would permit the investor class to get richer so Trump represented change and risk. Not five hours later the market reverses and streaks ahead.  

Today the market continues to charge ahead. Trump’s election promises of lower taxes, less regulation, less government, seems to be recognized for what it is- a growth agenda. But more importantly, Trump’s winning will result in the export of his policies abroad.

The dollar was already strong against all other currencies. The Fed has no choice but to seek to get to normality with interest rates, and soon. The more the US economy morphs towards higher GDP growth, the more US interest rates will rise. This is a good thing. We need to return to the old normal or an approximation for it.  

But as rates rise so the dollar will surge alongside GDP. As the dollar surges imbalances in exchange rates will lead to two cycles:

  1. Liquidity will center on US and emerging markets and other developed marked will contract as money seeks yield. This will starve other regions of cash. At the same time US exports will be hampered (not overly important to US national economy as a percentage) and for other nations, exports will balloon as their currency is cheaper. The result will be that the US trade deficit will itself balloon again. Inflation will get a fillip due to increased US demand (note that inflation is already showing signs of stability) and as a result, trade partners will suffer greatly under either the weight of their new economic normal (zero rates, no inflation, high relative tax rate, loose monetary policy) being inconsistent with a resurgent US or lack of capital.
  2. As a result, trading partners will need to raise their own interest rates to help stabilize currency markets. This will alleviate some of the dollar’s strength. But if this is the only policy followed, those trading partners will sink into the abyss of stagflation. They will therefore need to emulate many other of Trump’s polices in order to ‘keep up’. So deregulation, lower taxes and more devolved government (perhaps focused on education improvements and local healthcare) will follow.

Trump and his ‘buddy’ Yellen will together export Trumponomics around the world. And it will likely start by the middle of 2017 as the first increase in interest rates in Japan, Europe and/or in some emerging market is triggered.  

The real question though, the real conundrum, concerns China. China is still in a massively debt-fueled growth period and its currency continues to fall against the dollar. Trumponomics will push the Yuan down further and faster, helping Chinese exports to the US. But China will need to raise rates internally, or sell US treasuries (to buy yuan) or buy selling dollars from its massive foreign exchange reserves. Any and all of these will force the Fed to raise treasury yield and rates. Thus the entire cycle that has kept the world economy down for six years will reverse and little will stop it accelerating quickly. It could easily overheat within two years.  


Post Brexit Blues

While in the UK last week, on vacation with friends, I was lambasted by groups that were in the ‘remain’ as well as ‘leave’ camps. I myself had started as a ‘remain’ back in the early spring, but a week in London in March changed all that, after talking with many including some business people from Italy and Austria.  But the news from the UK is now jaundiced and suggesting difficult times ahead. The pound has suffered hugely since the Brexit vote, sinking to 30-year low against the dollar. It has gone from about $1.46 just before the vote to now $1.30.  I wrote this blog on the flight home to the US, landing to find that the pound had dropped again to $1.28.

The FTSE also took a big hit but it has since recovered. The bad news is that, according to reports, some business actions and conditions are changing even before the UK government starts the official application to exit the EU. Some banks are talking of moving headquarter staff to mainland Europe. More troubling some insurance and construction firms are already changing behavior. In Tuesday’s UK print edition of the Daily Telegraph, there was an article, “Standard Life Halts Trading at Property Fund after Exit Rush“. The report explores the impact of massive withdrawals from property investment portfolios. In summary, long term investment strategies related to construction in the UK are suffering a lack of confidence. 

Economically the UK is in a strong position. It does not suffer from as many of mainland Europe’s issues. It is even now at liberty to remove other EU restrictions and after Brexit is complete, it no longer will be held back in setting policy by 27 other independent groups.  But confidence is the issue here, along with ignorance. There is little material that really proves the UK economy will be worse off as a result of Brexit. Another story in the same print edition of the Day Telegraph reports that the German finance minster (Wolfgang Schäuble) was asked by David Cameron to weigh in on the Brexit ‘remain’ vote with comments emphasizing economic disruption. The press had thought the such comments were based on fact independently developed and facial: they were not.  

On a hugely positive note two other articles highlight really interesting points. One (see Never mind Brexit, real hope is in UKs soaring company start-up rate) suggests that the number of start-ups is running at historically high levels. This is a little known analytic that suggests that economic renewal is improving and this operates as a future driver for growth. Alas the same analytic in the US is in the doldrums and government policy is not targeting to improve this goal.

At the same time a report by S&P addresses (see Weaker pound to cushion the shocks of Brexit, predicts S&P) some of the pointless scaremongering that was created during the run-up to the vote.  The new article projects solid economic growth and a safe passage for the UK economy post Brexit, assuming a calm, rational set of trade and economic actions.  Finally some sensible reporting; no ‘end of the road’ reports now. It is just a matter of time before more of such reports are understood.

The U.K. print edition of the Financial Times offered some other interesting angles too. Some the ‘Remain’ camp won’t find all that comforting. Firstly in, “German employers warn against ‘punishing’ the UK“, the head of Germany’s employers body BDI was reported as saying that negotiations regarding trade between the EU and the UK should not penalize the UK. This is sage advice given that the UK is Germany’s largest export market behind the US and France. Equally Germany is the UKs largest export martlet outside of the US. Even Angela Merkel, the German chancellor, recently said that the UK should be given time to determine when it wants to kick off the official two year divorce process.

A second article, “EU Budget: British Breakaway to spark wider disputes on financing“, demonstrates that clear fact that the UK is a net contributor to the EU, to the tune of about £10bn (real, 2015).  As such, post execution of Brexit, the U.K. will have more money to spend on its own priorities and the EU will need to cut back spending unless it seeks to fill the gap made by the UK’s leaving by increased contributions from its remaining members.

The final FT article I spied calls out an unintended consequence of Brexit that may have long term impacts on global security and power. And this is not from the point of view of an aged and retired empire but from the point of view of tipping points. The article is called, “Tokyo fears Brussels Will Lift China Arms Ban after Brexit.”  This is a most interesting twist on Brexit not discussed in the press.

Britain is today a sizable advanced economy, globally connected financially (legacy, thanks to the pound being a past reserve currency), economically (due to being heavily reliant on trade), and politically (due in part to the export and use of the English language, common and business law and democratic practices). However some of the trappings of its empire led to some unique positions around the world. In 1920 Britain was allied with Japan, with stronger naval ties than with the US. This was partly as a defense mechanism from the UK perspective; post WWI the UK had lost its financial ability to project itself globally and was increasingly reliant on the benefit of others (e.g. US) and less so on its own asses. This was also partly a reflection of Japanese goals; it was seeking to emulate the success of the British Empire, founded on naval power, and was keen to learn from its erstwhile far-away neighbor the art of modern empire building. The alliance gave Japan credibility politically and militarily. The Washington Naval treaty of 1921 put paid to this alliance as the US forced Britain to relinquish the Anglo-Sino alliance in order to buy the support for the curtailment of expensive navel construction, at a time when no nation could really afford anyway.

But as it stands today the UK plays a key spoiling role in global politics, with a heavily nuanced and balanced position. The FT article highlights how Japan fears that with the British gone from EU diplomatic and political debate, the moderating position the UK too will fall away and views less acceptable to Japan, such as the EU selling arms to China, might now be in the ascendancy. This is a most interesting side-show that may have longer term security repercussions. Britain’s ties with China are improving, and its relations with Japan are long and very positive. Britain is again in a unique position.

If you wanted to read more about the UK-Japan connection, read Leo Lewis’s Short View for July 5. In his column he explains how the Nikkie 225 average is being hit for six by Brexit, perhaps more so than any other stock market index. He explores the relationship Japan has with the U.K. and why that leads the Japanese market to its painful conclusions.

But the reality is that no one knows what’s going to happen. Hence confidence and talking the economy up is critical right now. Astute confidence will help drive the pound up and hence reduce the losses experienced with the ‘leave’ vote.  As I said before, with Brexit re are no real winners.  But the UK has a great opportunity here…

The Relentless Rise of the Dollar and Fall of the Yuan

With sentiment at the Fed shifting toward a rate rise in June, and news today in the Wall Street Journal (see China loses resolve to revamp Yuan) that China is again worried about the pressure on the Yuan, we can all predict what is about to happen. 

The low interest rate the Fed promotes has been described as a response by the Fed to the lack of active policy by the US government to drive economic growth. The market distortion as a result of the low interest rate are frightening. There was a piece, albeit an opinion, in yesterday’s Financial Tines that explained the impact on savings (negative), retirement planning (disastrous), and debt (growing toward all time highs again).   But we will not change the government’s actions overnight, not until November that is, and even that is not guaranteed. So we are stuck between a rock and a hard place. The Fed wants to raise rates but has to avoid chocking off the meager growth that is limping along.

China has its own economic challenges. As it wrestles with the gradual transition from a manufacturing based economy to a consumer and services based economy, it is using the exchange rate to control its export competitiveness. Note that in recent times, in studying the UK’s transition between late 1950’s to the 1990’s, this effort won’t be easy or quick. But China is trying to move quickly, perhaps too quickly.  And despite the IMF signaling it’s faith that China was going to let the market drive the Yuan’s exchange rate, the People’s Bank of China (PBOC) continues to take action to stabilize its currency. 

Assuming the Fed increase interest rates in June, we will all hear that big sucking sound again as capital flies from emerging markets including China back to American shores and the powering dollar. This will trigger a fall in the Yuan and the PBOC will again start to leverage its foreign exchange reserve to stem the losses. That reserve has fallen from an estimated $4th to about $3.2tn in the last year or so. The question is, how far can that reserve go in defending the Yuan?

Sterling was ‘broken’ in the 1970’s and the U.K. Government had to go to the IMF for a loan – check out “Decline to Fall: The Making of British Macro-Economic Policy and the 1976 IMF Crisis, Douglas Wass, 2008”.  That was a low point for the UK. The pound was again ‘broken’, perhaps more famously, by George Soros during ‘black Friday’ when the UK was forced to leave the Exchange Rate Mechanism (ERM), a pegged exchange-rate system that preceded the single currency, the euro. 

Clearly the PBOC won’t use up all its reserves. So the question becomes: what is the level at which the market expects massive red flags? Perhaps a leading indicator to watch are the monthly reported FX outflows from the PBOC. As that ramps up, the red flags will start to fly. And they won’t be the party flags of choice- they will be the economic panic flags that none of us want to see.

The Incredible Shrinking Chinese FX Reserve

See: China capital outflow pressure persists.
Good news: Chinese reported foreign exchange reserves reversed recent direction and recovered in March and April.

Bad news: The falling dollar, triggered by the US Federal reserve’s no stationary interest rate policy, helps stem the flow.

Even worse news: If you take account of updated valuation of the dollar since its slide began, the actual flow of funds from China’s FX reserve did continue to contract: by $54bn.

At some point this year the Fed will raise rates again. The dollar’s fall will halt; it most likely will rise in value and with, that great big sucking sound will again reverberate around the world. Capital will flow towards the stronger dollar, the yuan and various assorted emerging markets will come under strain and China will again, in earnest, use its FX reserve to slow the yuan’s fall.  

Add to this the current moribund state of the global economy and their can only be one outcome: ongoing imbalances across major economies and no sign of the necessary collaboration to regenerate growth.

Fed Watch: Taking a Long-term, Global View, Suggests No Interest Rate Rise for a While

The IMF’s annual fiscal monitor is as full of good and albeit hapless ideas as ever. It’s gets off to a poor start. The IMF has been calling (correctly) on large economies to increase debt and spend such money on growth generating projects. This could include infrastructure spending or perhaps tax rebates or write-offs for increased innovation or capital investment. The executive summary reports that government debt has been increasing and now approaches pre-crisis levels- yet money (debt) has not been used in the way the IMF suggested, nor has it been coordinated by regions. The money has been squandered on political issues and wasted away. Consequently growth remains lacking and yet risks are now greater and growing. IMF scores a B+ for ideas, D- for coordination. And leading nations a strait F for fail.

More alarming news in this weekends US print edition of the Financial Times is in an article titled, Chinese shadow lending evades regulation and more critically, a Comment by George Magnus, associate at Oxford University’s Chine Centre and senior economic advisor at UBS, titled China’s debt reckoning cannot be deferred indefinitely. This last article calls out the known risks: the share of total credit in the economy is approaching 260 per cent of GDP. It seems it is on track to bust past 300 per cent by 2020. Note here that the US is in a simile boat. Ignoring all the complexities in the data, its reliability and quality, it seems China has so little wiggle room to cope with any economic pressure and also little head room to sustain its credit binge.

The first article suggests that even though official credit might be at straining point, there is much more credit being created outside of the official governance. Given the reportedly growing amount of bad loans, all this boasts badly for China, and so the global economy. If China were to sneeze, we all would catch a severe cold. Everyone else that matters is already at the doctors office waiting treatment.

Finally I read John Auther’s The Long View in the US print edition of the Financial Times. It was depressing reading. He calls out the four reasons why the good times (yes, these are ‘good’ times) will not continue. Of course these ‘good times’ relate to the equity market, which has been the main beneficiary of central bankers quantitative easing experiment.
The flour reasons are:

  1. Inflation has been tamed – can it ever be tamed again?
  2. Interest rates have fallen – they have to go up soon
  3. The economy has grown – few new triggers remain and demographic drag will increase 
  4. Corporate profitability rose – it’s leaked and in its way down

The article draws from McKinsey Global Institute and new research. All told its more data suggesting we are in the second half of a natural down cycle whose rise has been flattened by central bank policy and the lack of political policy agreement. We are now headed for what should be a natural slow down with no gas in the tank and no cash in the wallet and an already overloaded credit card. Hang in folks, it’s gonna be a bumpy ride.

Chinese Authorities Buck the Market to save the Yuan – but for how long?

Friday last week and Monday this week saw turmoil in global markets, primarily off the back of negative economic data from China.  With the recent changes in how the exchange rate of the yuan is managed, the yuan’s value crashed.  In Hong Kong last week its value dropped by as much as 2.7%, much more than the guided 1.1% the PBOC managed onshore.  To help assuage the difference and reduce the fall, the PBOC intervened in the markets and acquired yuan, as reported in today’s US print edition of the Wall Street Journal’s article, Beijing Steps In to Prop Up the Yuan.  In so doing the PBOC has probably spent another small fortune from its exchange reserves.  

Those reserves have already been reduced in the last year as China does its best to manage its currency’s fall more carefully than would otherwise happen in a free and open currency market.  It was recently reported that it’s reserves fell by $93m.  It is thought that the total reserve is now closer to $3.5tn, and that this has fallen from about $4tn.  However, with each and every intervention this reserve continues to decline.  This is good practice for sure and very common in the currency markets.  But how long can this go on?  Central banks will forecast long term trends and will try to determine when and if such intervention should slow down.  Too many politicians have fallen on their own currency sword when they try to ‘buck the market’.  Such behavior only works well for a while.  If the fall of the yuan is going to persist, intervention can only help so far.