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Wall St. and the Double-Edged Sword

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admin
on September 21st, 2009 | | Add a Comment

http://www.ft.com/cms/s/0/e4b1655a-a47f-11de-92d4-00144feabdc0.html

This is a well-written overview of the ambivalence in Wall St. towards government regulation – on the one hand, there is an institutional distrust of the heavy hand of government. On the other, that same hand helped lift the banks out of their death spiral by flooding them with capital, backstopping their loans and slashing interest rates essentially to zero.
Guerrera points out that even as banks rush to pay back their TARP funds and resume operating as they always have, the implicit guarantees of the Fed and the continuing fiscal stimulus mean that they are functioning under the assumption that, should the economy slip from its current, fragile path, the government will (they hope) be waiting once again with a financial safety net.
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Don’t Give Me Your Poor or Your Tires

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admin
on September 15th, 2009 | | Add a Comment (2)

Barack Obama’s sudden decision this week to slap a 35% tariff on Chinese tire imports may seem like a sudden bout of irrational protectionism. In fact, it represents yet another act in the endless Kabuki theater of international trade policy (yes, Kabuki is Japanese, not Chinese – but we live in a globalised age).

Neither side is in a position to throw platitudes about free trade at the other, as Clyde Prestowitz points out in his op-ed on the subject, 

“These include the assumptions that the markets are perfectly competitive…and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.


But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy.” (Financial Times)


Very true. As I mentioned last week, our economic relationship to China is deeply colored by both the artificially cheap RMB and their massive dollar holdings. Every action becomes invested with political significance, symbolizing some larger movement or principle. 


The drama in this case comes from the political significance of the auto industry. Tires don’t exactly make up a huge portion of US trade with China - $1.8 billion in 2008, or 4/5ths of one percent of total Chinese exports. Granted, that’s still a lot of tires. But the symbolic importance far exceeds the economic factors – tires represent the struggling US auto industry as a whole, and President Obama presumably saw an opportunity to score a political victory on behalf of the beleaguered manufacturers without really rocking the boat.

After all, it’s not as if China welcomes American imports with open arms. American steel and auto parts face steep protectionist tariffs as China tries to bolster domestic industries. Nor is this an isolated incident – In June, the government instituted a Buy Chinese program, although “Just a few months ago Beijing was raging against a proposed Buy American clause included in the US economic rescue package.”

It’s apparent that the leadership of both nations have locked themselves onto a political collision course that they either cannot or will not tack away from because of populist headwinds. 

China needs to maintain massive, double-digit growth to sustain their economic miracle while simultaneously appeasing both urban consumer elites and its vast rural population. American imports undermine domestic economies, forcing the government to either tax imports or subsidize their own factories. Unfortunately, doing so antagonizes American voters and politicians, who then retaliate in kind, hurting export-driven industries. Every industry involved in this squabble – poultry farmers, steel makers, automotive parts – has political resonance and a strong lobby.

President Obama, on the other hand, suffers from a fundamentally bi-polar approach to trade. He flips from fiery, protectionist rhetoric in the Rust Belt and industrial heartlands to hushed, backroom reassurances among elites and trading partners that speeches about tariffs are only sound and fury, signifying nothing.

His actions hearken back to former President George W. Bush’s 2002 steel tariffs, which were widely seen as a vote-winning maneuver that appealed particularly to the swing state of Ohio, a perennial indicator in presidential elections. Is it any coincidence that Cooper and Goodyear, two of the major US manufacturers, are also based in Ohio? The state’s (heavily unionized) steel and rubber industries give it the power to throw political haymakers.

Unfortunately for both the President and the people of both nations, China has called Obama’s bluff and appealed to the WTO. They are unlikely to win much, given that the conditions of China’s entry into the WTO included specific provisions allowing the US to apply exactly these sorts of tariffs in response to domestic losses caused by Chinese imports. If the WTO rules against China, though, it will probably increase Chinese suspicions that the whole organization is a tool for US policy abroad.

In the end, this game of chicken may end like so many others, by dropping off of the news cycle and giving national leadership the chance to veer away into compromise. But the stakes are higher this time, raised by the increased political volatility created by unemployment and recession. In times of prosperity, 5,000 lost jobs in tire-manufacturing are a shame – in a recession, they are a scandal. Resolution will depend on the ability of our President and the Chinese government to balance rhetoric with reality.

I’m not holding my breath.
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Oil and The Heart Of Darkness

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admin
on September 14th, 2009 | | Add a Comment

A bloody decade of civil strife has left the Niger Delta, blessed with fantastic reserves of oil, reeling from endless insurgencies and government crack-downs. The people of the region feel exploited by the boundless corruption of the government, while oil companies have come to rely on that same government to strong-arm militias and protect their fields and facilities. 

Michael Peel’s journey into the mangrove swamps and winding rivers of the Delta reveals a land ablaze with anger, resentment, religious tensions and economic difficulty. Perhaps the most ironic part of the conflict is the fact that many of the rebels apparently buy their guns from corrupt elements of the Nigerian military, using money obtained by siphoning and selling oil on the black market.
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Sovereign Bonds Move RMB into International Markets

By
admin
on September 10th, 2009 | | Add a Comment

Is it time to write the dollar’s obituary? 

The past five decades have seen the dollar achieve and maintain an unprecedented position as the leading reserve currency in the world. Reserve currencies are those which are held in large quantities by investors worldwide — essentially, dollars, yen and Euros. From long experience, I know that every nation with fixed currency controls breeds a class of money-changers furiously buying and selling greenbacks for tourists, entrepreneurs and even governments. 
Ironically, the collapse of American financial markets in 2008 actually resulted in a surging dollar. Investors worldwide ‘fled to quality,’ pouring their holdings into the perceived value and stability of the dollar. The dollar’s most important buyer is undoubtedly China, with $2.1 trillion dollars in foreign exchange held chiefly in U.S. Treasury bonds. Indeed, China is financing the U.S. deficit, leaving us precariously dependent on their government. 
The Chinese government seems to have taken a notable step back from their enthusiasm for the dollar, however. For the first time, it is issuing sovereign bonds denominated in Renminbi (RMB), the national currency that some believe China hopes to develop into an alternative to the dollar as the global currency. 
 Of course, the Chinese government still has a significant stake in a stable dollar – $2.1 trillion dollars worth, in fact. They’re caught between a rock and a hard place. Any slide in the value of the dollar will hit them hard, and the harder they push the RMB, the more they will weaken the dollar. 
That’s why it is unlikely the RMB will be replacing the dollar as an international hard currency any time soon. For one thing, no one is stockpiling RMB notes under their mattresses in Buenos Aires or Lagos. The market lacks depth – there are few physical RMB outside of China, and investors cannot sink large amounts of money into the market without drastically affecting it. The dollar, on the other hand, is the deepest and broadest currency market in the world. 
Furthermore, the Chinese government has always tried to maintain tight control over its currency. As it internationalizes and becomes more common in markets, they will find the law of unintended consequences coming into play. Their currency will move in ways they don’t want and can’t predict. There isa great deal of internal pressure in China to let the RMB’s value rise, as its artificially low level ends up hurting a growing class of Chinese consumers in order to stimulate exports. 
The dollar is still king, even as its value fluctuates. The financial world has prophesied the collapse of the dollar before – when it sank against the yen in the 1980′s, or when the Euro debuted in the late 90′s. Although its value may rise and fall, its place as a reserve currency remains unchallenged. 
I have confidence that the fundamentals of the US economy are strong, and with a quarter of the world’s GDP being generated in dollars, it will take more than Chinese bonds to threaten our currency. If the Euro, backed by all of the developed economies of Europe, could not dethrone the dollar, the RMB will have a hard time doing so. For now, the RMB is just one more currency on the market. 
Where the RMB bonds may come into play most strongly is the Chinese financial sector. Increased exposure to international markets will drive newly wealthy and even middle-class Chinese citizens to invest more outside in foreign exchange and international markets. In the end, how and where the Chinese people invest their money will end up determining the fate of the RMB.
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More On Venezuelan Coffee

By
admin
on September 3rd, 2009 | | Add a Comment (1)

Venezuelan Coffee Industry Suffering – Financial Times 

A little different from my usual topics, but these kind of stories are a good indicator of what happens when a government tries to decree how every aspect of the economy works. It doesn’t matter whether it’s currency or coffee beans – price controls lead to shortages, supply and demand get distorted, and a black market springs up.


“But analysts say many of the problems confronting coffee production – and the private sector in general – are caused by precisely this kind of government intervention. Such expropriations, as well as an aggressive land reform campaign, have generated a climate of uncertainty that has damped investment.


Price controls have made matters worse. Increasing amounts of coffee – and many other goods – are smuggled abroad to be sold at international prices. “Of course there’s contraband. What does Chávez expect when you can sell coffee in Colombia for double or triple the price?” said one coffee producer, who requested anonymity.” (Financial Times)


Venezuela used to export coffee all over the world, and there was a time when they were on par with Colombia. Now, it’s actually importing coffee from Brasil! In fact, domestic farms barely manage to produce half of the nation’s domestic consumption.

As we saw in the case of Black Market Bolivars, that means expensive, imported coffee. In trying to organize and protect domestic industries with the blunt instrument of state policy, Chavez has once again fallen prey to the law of unintended consequences. Although not identical, currency controls can undermine trust in the local fiat currency, prompting flight to quality. The coffee situation bears some resemblance.

There hasn’t been a drought or a change in growing conditions, and global coffee prices have generally increased over the past years. Of course, coffee isn’t money – it’s not totally fungible, and beans from Brasil aren’t the same as those from Venezuela, or Ethiopia, or Indonesia. 

Because of this, Venezuelan coffee is a distinct brand, differentiated from the competition. But Venezuela has been known for high-qualtiy Arabica beans, as the article points out, and producers like Don Paparoni (what a name!) are giving up their family plantations for pasture and other pursuits. Finally, coffee isn’t the only victim.


“Food imports have quadrupled in the past 10 years, from about $60 to more than $250 per person per year, says Hiram Gaviria, former agriculture minister. Imports cover about two thirds of food consumption in a country that boasts vast areas of unused, fertile land.


While production of some foodstuffs such as maize and rice has increased in this period, the production of beef and sugar, in which Venezuela used to be self-sufficient, is today barely half national consumption.” (Financial Times)


The market is there, globally – but it’s been badly distorted. In trying to fix domestic coffee production, the Venezuelan leader has exacerbated the very problem he set out to cure. Shame on Mr. Chavez.

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Black Market Bolivars

By
admin
on September 1st, 2009 | | Add a Comment

http://www.reuters.com/article/usDollarRpt/idUSN3139619020090831

If someone asked what the most expensive city in the Americas is, you’d guess New York City – and you’d be right.
How about the 2nd most expensive?
Not many people would go with Caracas, Venezuela, but that’s the answer, according to a Reuters story from yesterday. Thanks to a rigid official exchange rate and a weak supply of dollars – something I’ve used to my advantage across the globe – the black market exchange rate is almost 3 times the official 2.5 bolivars/dollar rate held by the government.
While basic, domestic products like food and clothing remain relatively affordable thanks to government subsidies and price controls, all importers are forced to scrounge together currency through back channels. Meanwhile, inflation rates keep people buying or converting their money into hard currency to avoid being left with worthless notes. Interest rates are purposely kept lower than inflation, reports Reuters, to keep people from saving.

Consumers are likely to continue to spend entire paychecks and shun savings in a country where interest rates are kept below inflation to encourage consumption. “

‘Why save? It will be worthless in a few months. It’s better to just spend the money and enjoy yourself while you can,’ said Maria Elena Blanco.”

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