Let’s get the IMF and G-7 noise out of the way. As usual, we will hear and read about all the brotherly love that will be shared at the IMF gathering but in the present situation we will be having none of it. The acrimony in the international arena on all economic issues isn’t going to be assuaged over cocktails and photo ops. Last year we heard about all the agreements that had been reached on global financial regulations and of course the prevention of currency manipulation and intervention. In a year all of that has been relegated to trash heap. The emerging world has been asking for free trade and have been rebuffed. China will bear the brunt of the major currency manipulator but many others are seeking to join the Chinese.
The emerging countries will argue that QE is currency depreciation by any other name. There will be no Plaza Accord or Louvre Agreement as it would be impossible to determine what rates should be established on which currency. In addition, it is doubtful that the Europeans would acquiesce to a rapid depreciation of the DOLLAR. As Riff says in West Side Story, “They say blades, we say blades. They say guns, we say guns.” The IMF conclave will not be pretty. And then throw in the European anger at the U.S. for using a procedural action to limit European impact on the directors level, which was to make room for more of the emerging nations.
In tomorrow’s Financial Times, our favorite foil provided us with fresh fodder. We talked about Sir Alan Greenspan in this morning’s post but today he gives us more of his need for EQUITY markets to rise so as to lift the “animal spirits” of business and investors. The maestro is determined to orchestrate a stock market rally,
“if fear-determined equity premiums were reduced and stock prices accordingly rose. That would spur capital investment [they are highly correlated]and wealth drivenconsumer expenditures.Economic growth would finally bring an important fall in unemployment.”
And that my friends is how you do the Greenspan Tango.
Sir Alan, if the FED under your guidance had stopped trying to continually bring demand forward the markets may have actually corrected and the long-term capital investment you so desperately desire may have actually taken place. Business is very afraid that so much DEMAND has been borrowed from the near future that the necessity for capital investment is on shaky ground. If future growth has been so badly compromised by today’s action, business is concerned that future profits will be far less.
TWO QUICK HITS. As the ivy dies at Wrigley Field, it seems that the IVEY is growing up in Canada. The PMI of Canada data is referred to as the IVEY index and the market had been anticipating a reading of 63, but the actual number was 70–far better than anticipated. It seems that business confidence is picking up in Canada but as in the U.S. we will see if the unemployment number on Friday supports the Canadian business confidence.
Second, today LEXUS announced that it was installing a large rebate program in an effort to maintain its no. one luxury car position. It seems that MERCEDES has/is taking market share from LEXUS for the first time in many years–EUR/YEN anybody? Again, we will argue that the DOLLAR/YEN is not the issue for Japan. It is now the EUR/YEN that Japan has most to worry about. After a recent 10 percent gain for the EURO against the YEN, the cross is still 13 percent lower on the year. It may be anecdotal but the LEXUS/MERCEDES spread is a good barometer for measuring the impact of currency movements on manufacturing.
Tags: demand, Dollar, equity, Euro/Yen, Fed, G-7, IMF, IVEY, Lexus, Mercedes, PMI, QE, Yen
October 6, 2010 at 10:25 pm |
Amazing how the one country that really needs to devalue (japan) can’t. The Mercedes/Lexus argument is quite relative. With Toyota already suffering, and Hyundi making huge inroads in the overall car market Japan can’t afford the yen to appreciate (vs euro or dollar) much more. The fact that China is a large buyer of JGB’s is almost irrelevant at this point. China has proven that they will continue to do what is in their best interest. Not the world’s. Time to catch on to that fact.
October 6, 2010 at 11:24 pm |
The Greenspan Tango has morphed into the Bernanke Waltz.Greenie juiced the economy in 1998 because of the Asian Tiger problem which led to the dot com and telecom boom and the subsequent Nasdaq bust of an 80% decline. The housing bubble he and Big Ben then enabled have brought us to our current sorry state. Our currency is now being sacrificed on the altar of inflating our way out of the debt induced deflationary pressures. Deleveraging and restructuring, a painful but ultimately best solution, has been disregarded as policy by our Fed chiefs. Gold is reflecting this disregard for preserving the buying power of the dollar,a Fed mission now abandoned. The Can’t See Bubbles in Advance professors create in their bubble blowing cycles of greater crises which if continued will lead to the Greatest Depression.
October 7, 2010 at 4:54 am |
Fred –having read that Greenspan piece in today’s FT over and over,I just shake my head over and over.The sad part is that wall street is addicted to the Greenspan PUT –truly sad for its entirety is debasing the economic foundations of the developed world.
October 7, 2010 at 5:34 am |
Soros is also calling more stimulus, “America needs stimulus not virtue” FT october 4
October 7, 2010 at 5:36 am |
So, be it as they say – irrational unfundamental asset reflation in full swing propelled by the currency wars. Given that the Republicans’ win and tax cuts extension are practically assured of, when do you think the music stops? Germany rollover? Europe rollover? China rollover? In 6 months?
October 7, 2010 at 12:38 pm |
Paul,
Given you’ve offered us to venture a guess, I would strongly err on the side of a European rollover post-February. Between the continent’s labor force and relative lack of mining and agribusiness, the cost push scenario with which we are faced globally seems almost demonic from a European perspective.
It has been the focus of discussion that the European equity markets failed to perform in percentage terms when compared with the US equity markets from the mid 1990s through present day. Though this is anecdotal and the reliability of the measurement requires further scrutiny (available liquidity), when you add a shared currency that has embarked on an increasingly unstable up-trend for reasons that are not fundamentally sound, the ensuing fall from grace may in fact prove to be more rapid than the previous rise to stardom.
Devaluation, though wrought with negative implications, is an irreplaceable alternate course of action, and is required as a policy option by a number of EU member states to address their current predicament.
October 7, 2010 at 9:19 pm |
arthur –saw the soros piece and didn’t deserve a comment for my thoughts would have been reflexive.
October 7, 2010 at 9:22 pm |
Paul M.–good solid thoughts.The problem is the EURO is the alternate choice now until the U.S. can decide where it wants to go and how.The last year saw central banks sell EUROs from reserves and they realized they were under invested relative to trade weights have had to buy back the EUROs–especially the Russians and now I think we have seen large Chinese buying.Also the Japanese have been way underweight the EURO.