So-Called Anti-Protectionists: Be Careful What You Wish For

Macro

So-Called Anti-Protectionists: Be Careful What You Wish For

We haven’t heard much from the so called anti-protectionists (i.e. the rhetorical protectionists) in have we? Perhaps they have been pre-occupied with the recession or perhaps there is more to the myth that there is a certain hypocrisy in this scapegoating, given the US itself could be embarking on a structural manipulation of its currency. If you cast your memory back, the defining moment came when China waited for a lull in the bombardment of anti-protectionist sabre-rattling from The West and seemed to politely ask:

“I request the US to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets” [Chinese Premier Wen Jiabao].

After which, interestingly, the protectionist venting fell silent and the China-bashing seemed to stop… funny that. I have a feeling that “Wen’s Whisper” rang so loud it shook the walls on Capitol Hill and deafened the ears of bandwagon “anti-protectionist protectionists” who thought they might secure electorate brownie points with a bout of good old fashioned scapegoating. But the message was clear to all: while the US is undoubtedly the sole political and economic super-power (and will remain so by a long stretch for a very long time) we can no longer continuously threaten China as though it has little geopolitical influence – those who bark the loudest do not always have the hardest bite.

Never-the-less, the question Premier Wen raised is still a relevant one – how can the US guarantee the safety of Dollar assets? The Greenback is weak and it’s only getting weaker. There are those who say: yes, but the weaker Dollar is just a sign that people are taking risk again and dumping the so-called safe-havens (just like during the crisis a rising dollar was due to a “flight to quality”). So let’s be clear about this:

• There are a number of Central Banks making noises about diversifying out of the Dollar – that’s a structural, secular shift
• There are a number of investors (including the World’s largest, PIMCO) who have not only shifted their portfolios away from $ denominated assets they are openly encouraging others to follow suit (and giving rational reasoning for it).
• There are rumors that the Middle East is not only considering its own common currency but that it will also explore a new currency denomination for oil
• Numerous quarters (including China) have planted the seed for a new global reserve currency or currency mechanism outside the Dollar – bilateral currency agreements outside the dollar have already been in place
• If you price gold in “anti dollars” or in the DXY index then you find (as BCA Research pointed out) that we are nowhere near the highs in gold – implying that the recent highs in gold price is due more to weak demand for the dollar than great demand for gold.
• Deficits. Public Debt to GDP ratio etc, etc etc… The Fed is printing money like it’s going out of fashion… and, actually… ermm, it is…
• Finally while, we did see a flight to the Dollar in the midst of the crisis, it did not hit a ten year high as equities hit a ten year low… in fact it didn’t even come close… in fact here is a graph of the Dollar Index over the past ten years. 

Source: Bloomberg

Incidentally, the caption reads: “fairly clear trend”.

In fact, if the Dollar Index hits 70 it’ll be the lowest level EVER.

If the Yen/Dollar hits 80 it’ll be the lowest level EVER.

So perhaps Geithner is sensible to think twice before insisting that the US is running a “strong dollar policy”, as Paulson did – it is having an affect on credibility.

For those who think I’m off my rocker for suggesting that the US may not be running a “strong dollar policy” have a listen to what Axel Merk said on CNBC last night – it all starts with the phrase: “they don’t try to devalue their currency like the US does…” – very open and direct opining here, I’m impressed, worth listening to the end!

So I may be “nuts” to even suggest that the US may be calculatedly devaluing its own currency, but I’m not the only one to be asking the question – and I suppose that’s my point, really.

China keeps its peg for now, the Yuan has not moved out of its tight range for over a year now. Many signal that this is a sign that China is too cowardly to adopt a more domestically supported economy or that China foolishly assumes that it can continue to rely on the World’s largest consumer (US) to buy its goods indefinitely. But let’s stop to think about this, it’s tempting to think of the USD peg as a blinkered bilateral arrangement – but is it? True; as the Dollar retreats, Chinese exporters do not lose any competitiveness to US consumers due to the peg, but remember they also gain competitiveness to other consumers against relatively stronger Euro, Yen, Aussie Dollar and other currencies important to China. As if by perfect coincidence, at a time when China needs to rotate its export machine to more multi-lateral/balanced/diversified model, a weakening Dollar (and thus a weaker Yuan) is enabling Chinese manufacturers to explore new trading partners and cement new global trading channels away from the US.

It is tempting to think that, when China offered to relax ruling on its currency peg to the Dollar that this was an example of China bowing down to US political pressure. Perhaps, in part, it was, or perhaps they were thinking two steps ahead and not just one. Once China has used a USD-peg and bilateral leverage with the World’s largest consumer to develop its infrastructure to a certain critical mass, it can then rotate the manufacturing sector to sling-shot its exporters to a more mature, dynamic, multi-lateral engine, capable of mixing it up and competing independently toe-to-toe with the World’s most sophisticated manufacturers and engineers in Japan and Germany. Not only is this one step closer to a mature manufacturing industry, it is also one step closer to a floating currency and a mature financial sector. China’s trading relationship with Japan is quite well entrenched (a few millennia old), but look out for more protectionist rhetoric from Merkel and Sarkozy’s respective administrations over the course of the next 12 months.

Also look out for Chinese Whispers in late 2010/early 2011 concerning “rebalancing” its currency peg: giving more weight to currencies with trading partners outside America. The US recovery is highly dependent on real interest rates and thus demand for treasuries across the curve. Not long ago, US officials were lambasting China for not permitting a free-floating currency. Perhaps they should be careful what they wish for.

Macro Data to Watch:

• Industrial Production in the US
• Industrial Production in Russia

 

 

Markets

Well, yesterday I mentioned that if current trends in the British Pound persist, the UK economy was in a bad way… and WHOOOF! A massive rally in the GBP – worth keeping an eye on this to see if it builds momentum. This could be your lifeline, Gordon Brown, a stronger/stable pound is like a painkiller for the average UK consumer and thus the electorate.

A strong rally in the S&P after disappointing start by the banks – the rally continues. Stocks up, $ down. I forgot to mention yesterday that the Dow broke 10,000 – but to be honest I’m not sure the meaning of this we’ve broken 10,000 so many times in the last 10 years it only highlights that it’s a level we cannot seem to get away from and shows that Mauldin’s call for a “muddle through decade” was pretty much spot on.

The VIX hit a new low today 21.5 – we are getting close to the “happy days” level… the pre-Bear Stearns prices. Did I really just say that? Yes… I did. It’s all over – where’s my champagne glass then?

Global Stocks to Watch:

• Huge Spike in UK grocery/retailer Sainsbury on speculation that Qatar’s Sovereign Wealth Fund may acquire more shares – looks like an aggressive short covering rally to me.
• Pfizer stock rallies on good volume after announcing measures to cut costs on research after merging laboratories with Wyeth.
• Earnings:
  • Bank of America
  • Haliburton
  • GE