In the world of global financial investment and trading, we always want to examine what changes appear on the horizon. We see investors shun currencies that have strong underlying fundamentals, while desire weak, structural economies because of high interest rates in a world of relatively low rates. Our goal is to be on the alert for changes in fundamentals, as well as investor sentiment, for we believe that the nature of trading is one of great dynamism. While others rely on models and “sound” math, we look at the entire picture and try to put together scenarios that will reward whatever strategies our readers wish to employ. Analyzing the macro world to find the rewards of 2+2=5 is our goal.
The first quarter is history but mostly a prologue for the unfolding economic and political events. Tomorrow is the end of the FED buying MBS and we will begin to see if in fact the market has already anticipated the event and priced the long end to the preconceived event. This thought will be tested if the unemployment situation starts to significantly improve. Friday will bring the first positive NONFARM PAYROLL in many moons, but the ADP number today has already tempered the exuberance that had been building for a 300,000-plus number. The Easter- and Passover-shortened market will make a robust number that much difficult to interpret. Whatever markets are available to trade will be erratic and volatile. If we get a 300,000 number because of the census and other government jobs, the interest rate markets will get slammed but we would look to buy a large break in the short end of the market as a one-off number distorted by government hiring will not get the FED excited. The process to tighten will need a pattern of job growth to remove the political heat from a premature increase in rates. Check resistance levels on the 2/10 curve to verify this analysis. Also, the unemployment rate is very important because as job growth takes place, many of the long-term unemployed will come back to search for jobs, which should drive the rate higher in the short-term, even as the job picture improves. The FED will be reluctant to raise rates with a 9.5% unemployment rate, especially with Congressional election season upon us.
In the realm of 2+2=5, there was a story today that members of the G20 (US,UK,France,South Korea and Canada) sent Chinese leaders a letter reprimanding it for obstructing the G20 process for coordinating national strategies to promote global growth. In an FT article, the letter signed by Obama, Sarkozy and the other three heads of state said,
“The need to design cooperative strategies and work together to ensurethat our fiscal,monetary,foreign exchange trade and structural policies are collectively consistent…”
This letter of reprimand is an example of the unbalanced thought that poses as policy on the world stage. First, China is reprimanded for failing to live up to soft agreements when the European has hard agreements that 16 countries with a common destiny cannot even live up to. Second, why would you go on public record with a reprimand to a country that you are asking so much from–currency cooperation and, of course, an Iranian sanctions agreement? Is this really the time for reprimand and recrimination toward a potential partner? Third, the letter reprimands China for failure to push the DOHA round to a final agreement. Do the signees look at their agricultural policies and other non-competitve trade practices that each of their domestic political needs demands? Sugar and ethanol duties on Brazil is a good place to start.
Thus, we enter the second quarter with many variables in play and a high probability that anything that is on the burner will come to a boil. Tonight there’s a story that China is ready to okay harsh sanctions against Iran and finally move a U.N. vote. We are skeptical to say the least, for it would look as if China was caving to global pressure, but we await the outcome. Welcome to the season on RENEWAL!
Tags: DOHA, Fed, MBS, Nonfarm Payroll
April 1, 2010 at 1:01 am |
May I draw attention to the pertinent and very interesting Stratfor piece, “China:Crunch Time,” March 30, which deals with a US abandonment of the longstanding approach to managing foreign politics via the backdoor instruments of the Bretton Woods Agreement. Attached is a quote from the said essay:
“For Beijing, few alternatives exist to American consumption should Washington limit export access; the United States has more disposable income than all of China’s other markets combined. To dissuade the Americans, China could dangle the carrot of cooperation on sanctions against Iran before Washington, but the United States may already be moving beyond any use for that. Meanwhile, China would strengthen domestic security to protect against the ramifications of U.S. pressure. Beijing perceives the spat with Google and Obama’s meeting with the Dalai Lama as direct attacks by the United States, and it is already bracing for a rockier relationship. While such measures do not help the Chinese economy, they may be Beijing’s only options for preserving internal stability.
In China, fears of this coming storm are becoming palpable — and by no means limited to concerns over the proposed U.S. export strategy. With the Democratic Party in the United States (historically the more protectionist of the two mainstream U.S. political parties) both in charge and worried about major electoral losses, the Chinese fear that midterm U.S. elections will be all about targeting Chinese trade issues. Specifically, they are waiting for April 15, when the U.S. Treasury Department is expected to rule whether China is a currency manipulator — a ruling Beijing fears could unleash a torrent of protectionist moves by the U.S. Congress. Beijing already is deliberating on the extent to which it should seek to defuse American anger. But the Chinese probably are missing the point. If there has already been a decision in Washington to break with Bretton Woods, no number of token changes will make any difference. Such a shift in the U.S. trade posture will see the Americans going for China’s throat (no matter whether by design or unintentionally).
And the United States can do so with disturbing ease. The Americans don’t need a public works program or a job-training program or an export-boosting program. They don’t even have to make better — much less cheaper — goods. They just need to limit Chinese market access, something that can be done with the flick of a pen and manageable pain on the U.S. side.
STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.
Perhaps, if it isn’t too late,this is why China may join sanctions against Iran? Perhaps if it may even bend further if it can?
April 1, 2010 at 3:41 am |
newt—good post thanks.this is the type of dialouge we wish to promote for this enlightens.While we certainly don’t always agree with stratfor we respect their thinking and this is a very high quality piece of their work—much to chew on here and with team Obama beginning to feel their oats the may well be the road they take—but with the terrorist activity in Russia the world is going to get very messy.Can you imagine Natanyahu saying the things that Putin said and the world sitting quietly—as the French said to the Russians upon invading Georgia–we understand what you have to do but please be gentle—oh yes messy indeed.And by the way a Chinese reval is only about posturing and will have zero effect on u.S. trade—–but it will be good political expediency which is always a problem
April 4, 2010 at 4:31 pm |
[…] is some of the best out there. Better on the politics than the economic predictions. Read the post for it will fit nicely with where we are heading in today’s […]
April 5, 2010 at 10:33 am |
hmm,
that strafor article shows the big picture in which the us is the dominating force.
and they might have a point in the mid term elections.
but i still cannot imagine a real economic war between the us and china since both desperately need each other.
neither party can decisively tell how an escalation of policies would ultimately play out and who would stand to win after the dust will settle.
let´s say the US labels china a currency manipulator and limit chinese access to the us market.
how would the chinese react?
-of course they return the favour (how about those us car manufacturers desperately relying on the chinese market)?
-what about intellectual property?
-what about the countless JVs?
and then there is of course the nuclear option:
it would need just a little agressive dumping of a small portion of chinese owned treasuries to induce a market panic that could threaten the treasury market and the dollar.
my prediction: just like in the cold war both partys know that serious action would induce serious consequences.
that´s why both will keep cool heads and diplomacy will prevail.
the us won´t label china a currency manipulator and china will allow for a little bit of yuan appreciation in the months to come to give the democrats something to show.
everybody will be happy.
deep inside both the US and china know that a revival of us exports is highly unrealistic.