“The whole of Hamlet turns on the crucial distinction between reason and will, and between that which is and that which seems to be, and the test of success is the extent to which the protagonists conform their will to reason and to the reality to which it points, irrespective of all appearances to the contrary.”
Joseph Pearce, “The Relevance of Shakespeare”
Commentary & Analysis
Are Comdols in the cross-hairs of global trade? […and Reader Mail]
Com-dols – or commodity dollars (Canadian dollar, Australian dollar, and New Zealand dollar) in fancy fx trader lingo!
As we know, or think we know, commodity dollars are usually liked with the prospects for global growth, cross-border trade, and of course, demand for commodities; it seems, despite the sentiment the global recovery is building, there are still concerns on all of these fronts. And I don’t believe today’s poor US GDP report for the first quarter did much to alleviate these concerns.
US exports for the first quarter of 2014 declined a whopping 7.6%. Global trade still appears fragile six-years on since the credit crunch. We dubbed the credit crunch as a secular game changer for the consumer and a leap into The New Abnormal as the feedback negative feedback loop of aggregate global demand and rising global debt keep on giving.
The pressure on global trade is vividly apparent when you consider the pressure on the Asian-block countries whose raison d’etre is exports:
Source: The Wall Street Journal
In a piece written by Wayne Arnold, appearing in yesterday’s Wall Street Journal:
“Exports have seen sharp downturns over the past two decades, after the 1997 Asian financial crisis and the 2001 bursting of the dot-com bubble. But they quickly rebounded to double-digit growth after little more than a year as the world’s economy healed.
“Not this time. Exports jumped in 2010 in the wake of the global financial crisis. But they have slumped since and now are barely in positive territory, even as the U.S. economy has stirred back to life.
“This sluggishness reflects a sharp shift in the global economy. For decades, going back to the 1960s, Asian economies led by Japan, then South Korea, Taiwan and China, became the world’s factory floor, marshaling cheap labor to propel a wave of exports.
“Today, it is unclear whether exports can still provide that oomph. Overall growth is slowing in many Asian nations, forcing policy makers to ponder whether demand from their own consumers can fill the void.
“’That model that Asia had of relying on the trade channel—that’s gone,’ said Markus Rodlauer, deputy director for Asia and the Pacific at the International Monetary Fund in Washington.”
If all this is true, one wonders if corporate earnings expectations might be a bit out of line with real growth prospects. But none of that stuff really matters given the belief central banks’ outright targeting of financial assets is all that matters. Someday the other stuff will matter. And it the speed in which it starts to matter will startle.
Call it a mean reversion. Call it a practical application of the Theory of Reflexivity. Or call it a bear market. Someday we will be visited by the ghost of central bank unintended consequences. [Comdols, despite a shift in the ole Risk On and Risk Off game, are still positively correlated over the longer term with equities, especially the New Zealand dollar. This is why longer term, if the market does break, Comdols will likely get hit hard as they did during the credit crunch.]
Many are still quite comfortable pouring their retirement money into stocks. Why not, given the pitiful yield in deposit accounts? When I actually speak with people about the market, as painful as that can be and as much as I try to avoid it, I keep flashing back in my mind to the scene from Star Wars, the movie, “The Empire Strikes Back.” In that scene Yoda is teaching Luke Skywalker how to become a Jedi Knight as look is about to enter a dark cave which contains some scary surprises:
Luke: I won’t fail you. I’m not afraid.
Yoda: You will be. You… will… be.
I think those who aren’t afraid of the market now should be; and “will be.” Yoda goes on to give Luke one more very important piece of advice:
“You must unlearn what you have learned.”
As my own trading progresses (at least I believe it is progressing) I continue to unlearn what I have learned, and it’s why I attempt to avoid conversation about Mr. Market. It is much easier said than done, especially when one writes a missive such as this.
We have learned not to worry too much. The Fed is there for us. But we’ve also been conditioned to believe Asian and emerging market growth (despite current bumps in the road) will be there to help the US and Europe pull the global growth wagon. Many remain confident China will dump more liquidity onto the market, supporting global growth and sparking another run higher in emerging market stocks.
But it seems, at the margin, one can detect a slight degree of desperation from Chinese officials despite the confidence they exude most of the time. The engineering of a weaker currency of late seems part of this growing desperation.
USD/CNY Daily: Up about 3.7% since the low back on January 14th.
…and against the Japanese yen….JPY/CNY over the same time period is up about 6.6%…
And more signs of desperation appeared on the Reuters wire today:
China’s premier vows support for exporters, graduates – RTRS
Says to quicken tax rebates payment for exporters
Says “arduous efforts” needed to hit trade target
Pledge support to college graduates find jobs
Li told a regular cabinet meeting that the government faced a tough job to achieve its trade target this year, according to a statement on the central government website, www.gov.cn.
“China’s trade is facing a severe and complex situation and we need to make arduous efforts to achieve the annual goal for trade growth this year,” Li said.
“We must take resolute and forceful measures to promote steady growth in exports and imports.”
Look back at the at that Asian Broken Model chart above. As you can see, it isn’t a stretch to believe others in the region may also be looking to take “forceful” measures to promote growth in exports. And keep in mind the math of global macro: one country’s surplus is another’s deficit. US imports also declined during the first quarter, falling 1.4%. Unless domestic consumers take a greater share production in Asia, the pressure will build, especially in China. [And we haven’t even mentioned how Japan and others may use the Trans-Pacific Partnership trade pact to wage stealth economic war against China.]
Can China stimulate its way out again? The short answer is yes. But at the expense of adding more risk to the system—shadow banking and huge excess capacity (denting competitiveness against a strengthening Japan) that will come home to roost in a bigger way down the road.
Either way, it seems to me the commodity currencies, despite showing some recent depreciation against the US dollar and euro, are still vulnerable on the global trade front.