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Key News

  • The International Monetary Fund, dismissed as increasingly irrelevant when the world economy was booming, will now wield more than $1 trillion to help bring it back to life. (Bloomberg)

Key Reports (WSJ):
8:30 a.m. Mar Non-Farm Payrolls: Expected: -671K. Previous: -651K.
8:30 a.m. Mar Unemployment Rate: Expected: 8.5%. Previous: 8.1%.
10:00 a.m. Mar ISM Non-Manufacturing Index: Expected: 42. Previous: 41.6.


“To understand reality is not the same as to know about outward events. It is to perceive the essential nature of things. The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential. But on the other hand, knowledge of an apparently trivial detail quite often makes it possible to see into the depth of things. And so the wise man will seek to acquire the best possible knowledge about events, but always without becoming dependent upon this knowledge. To recognize the significant in the factual is wisdom.”

                              Dietrich Bonhoeffer

FX Trading – Declare victory and party hard!
A new world order has emerged.  Well, Mr. Gordon Brown said so! 

This was our favorite line in a story from the Financial Times this morning summarizing yet another gathering of world leaders long on smiles and commitments, but short on details of how to get there:

“Mr. Brown claimed that China had agreed a $40bn contribution to IMF funds. Chinese authorities could not confirm that last night. The IMF declined to comment.”

That’s fresh!

But the crowd gathered in London due to G20 realizes better than most that perception of reality always trumps reality, at least until reality catches up.  And based on the price action in stock markets across the globe, the perception of success, or lack of total failure, is
reflected in the price.  And of course, as stocks go, so goes the greenback in the opposite direction…


We always keep firmly planted in our forex trading mind, that no one ever knows when what is perceived a correction is really a major trend change.  Many dollar bears are touting that this may be it for the buck, back into long-term decline given the red flags of world reserve currency status concerns raised by the Russia and China. 

Though we believe these concerns are more bravado and smoke screen to divert attention from their own woes, Russia and China are correct in their assessment that US fiscal situation is ugly and getting uglier.  But what is interesting is the fact that the US administration in efforts to stimulate, in order to gen-up our consumers, benefits China more than the US in the long run.  So, China once again gets to play it both ways (something the US reserve currency status prestige has allowed the US to do for many years). 

If one believes balance growth should be a goal, and I emphasize the word “growth,” in this sentence, then one must view the G20 as abject failure.  For there was no real agreement on what constitutes the bedrock of growth: risk capital applied by entrepreneurs in order to produce real goods and services that best serve real people and maximizes profits as proof said organization operated with maximum efficiency; or something close to that.  This is something the so-called green movement should get behind–helping companies maximize profits because it saves all of our collective resources.  I’d love to pose that agenda item at a the next socialist green movement meeting…LOL

But back to the macro stimulus versus growth thing…maybe we missed it, but we didn’t hear many calls for China to use its massive surplus reserves to provide massive stimulus to its domestic economy.  Instead, there were a lot of calls for punishing risk taking and all those bad capitalists.  Why is it critical for China to provide massive stimulation: Because no matter what the Obama Administration tries to tell us, it looks as if Mr. Consumer will be spending many years repairing the damage to his balance sheet instead of buying increasing amounts of Chinese goods.  So, the logical solution to the global problem has been completely avoided by our “leaders.” 

China knows that increasing exports again, and reconstituting the symbiotic relationship with the US consumer–overproduction balanced by overconsumption is the easy way out.  Transitioning to domestic growth will be a gut wrenching process.  So, we sure don’t blame China or any other former export-oriented economy to want that.  But we do blame the US administration to be foolish enough to try to travel down this path again.  Maybe it proves powerful interests making a lot of that nasty capital from China trump logic again. 

This is a dangerous path to travel. 

Why? Well because China wants to make its trading partners take on the pain of this global adjustment as opposed to taking the hit domestically.  Again, it makes sense especially if the US Treasury is willing to throw good US taxpayer money after bad.  If you review economic history, you realize the US tried to do in 1929 exactly what China is trying to do today: force the pain of adjustment because of overproduction and under consumption domestically on to trading partners.  The US was China, from an economic standpoint, in 1929.

Below is a slide from a recent presentation I gave on the topic of global rebalancing and its currency market impact:

US in 1929 was China!

  • Asian countries built FX reserves as insurance against another 1997-98 Asian Financial Crisis believing global demand would continue unabated. They didn’t develop their domestic sector.
  • Because global balance of payments must balance, US took on the role of recycling the “savings glut.” So, who was really responsible for the credit-crunch?
  • The “savings glut” stimulated consumer demand and increased debt levels everywhere, triggering excess consumption and excess production (China).
  • Export model dependence and lack of domestic market relative to economy means when demand falls globally, the majority of the adjustment will be borne by the trade-surplus countries.

Key point: The US was the trade-surplus country in 1929; it is why the US took the brunt of the global adjustment domestically.  China’s trade surplus now represents a much bigger percentage of its total economy compared to the US trade surplus in 1929.  So, if US savings rates continue to climb and stay there, the fundamental reasoning of an export-model is history.  China’s adjustment could be much more severe than now expected.

* Reference the Far Eastern Economic Review, February 2009, for a great piece on this topic, which was the source for this summary.

The US triggered a global trade war in 1929 because it tried to make others absorb the pain and avoid the domestic adjustment i.e. instead of providing massive stimulus to gen-up its underdeveloped consumer sector, the US tried to increase its exports and rest on its overproduction of goods to fire up growth.  Thus Smoot-Hawley emerged.

Why we think China is so much more exposed here is because the relative size of China’s domestic sector, as a contributor to overall growth, is much smaller than it was for the US back in 1929 i.e. the US consumer sector though underdeveloped then, represented a much bigger share of GDP than China’s consumer sector does now. 

Bottom line: This problem was not addressed as far as we could see.  In fact China seemed to be treated with kid gloves instead of tough love.  Thus, despite the smiles and photo ops, and despite the hollow rhetoric about free trade and open markets, the specter of massive global protectionism looms larger than it did before the G20, we think. 

But as we said, perception rules, and we want to ride this perception until reality rudely gets in the way. 

So party on dudes!  Sell the dollar and buy stocks.  The G-20’s got your back.

Have a great weekend.