Notes From Underground: The G20 Is as Shaky as a “Fiddler On A Roof”

Indulge me, my readers. When I saw the movie Fiddler On the Roof 43 years ago with my now-wife, there was a line that made me laugh for it mirrored conversations that we shared about my nose always being buried in a book about history, economics and probably politics. In the movie, the young radical Perchik wishes to ask Tevye’s daughter, Hodel, to marry him. The question takes place in this dialogue:

Perchik: Hodel there’s a question, a question I … I wish to discuss with you
Hodel: Yes?
P: It’s a political question
H: What is it?
P: The question of marriage
H: Is this a political question?
P: Well, yes. Yes, everything’s political. Like everything else, the relationship between a man and a woman has a socio-economic base. Marriage must be founded on mutual beliefs. A common attitude and philosophy toward society.
H: And affection?
P: Well, yes, of course. That is also necessary.

The basis of the interchange is that everything is POLITICAL. Yes, it may have an economic base for the parties involved but all sides have their own political agendas. When a set policy provides a positive outcome the parties all find mutual contentment, similar to a good investment agreement where all parties share in the rewards. The G20 seeks to be a marriage of the remnants of the old Bretton Woods order, with the U.S. as the keystone of the international financial system coupled with the rising emerging economies of what was previously deemed the third world.

Until the previous decade, the global order was centered upon the G7: Canada, France, Germany, Italy, Japan, U.K. and the U.S. The old world order was finally brought to rest by the rapid development of the so-called BRICS, so the G7 had to make room for Brazil, Russia, India, China and South Africa: A marriage for a new economic reality. The politics as usual are still being worked out as the previous power centers never want to admit to a reality of diminished authority. Everything is POLITICAL.

The G20 met in Washington D.C. on April 16-17, and, as in typical fashion, released a sanitized statement about their discussions and efforts to promote global growth and social goodwill. Most of the communique is gibberish about promises made for a better world that sounds like any political campaign rhetoric. However, sometimes there are potential investment opportunities buried in a paragraph. This COMMUNIQUE had no buried treasure but in the second point this is found:

“In an environment of diverging monetary policy settings and rising financial market volatility, policy settings should be carefully calibrated and clearly communicated to minimize negative spillovers. When dealing with macroeconomic and financial stability risks arising from large and volatile capital flows, the necessary macroeconomic adjustment could be supported by macro-prudential measures and, as appropriate, capital flow management measures.”

It seems to me that there was a great of discussion within the G20 about the destabilizing effects of QUANTITATIVE EASING in some of the emerging markets. IN MY OPINION THE G20 has apparently resigned itself to the potential use of EXCHANGE CONTROLS if needed to stem the financial instability caused by global HOT MONEY flows. This issue of HOT MONEY flows has been a topic presented by the Governor of the Bank of India, Raghuram Rajan, as well as a continuing issue for the Chinese government and People’s Bank of China. In concluding the thought, the paragraph ends with a nod to the established order. “We reaffirm our previous exchange rate commitments and will resist protectionism.”

Prior to the release of the G20 communique, the Financial Times published an interview with Chinese Premier Li Keqiang. The interview included an interesting qualifier by the FT editorial staff: “Unlike many interviews with senior Chinese leaders, this encounter was unscripted  and the FT’s questions were not submitted to the Premier or his staff beforehand. Although the substance of the meeting was initially intended to be off the record, Mr.Li later agreed to the FT publishing the entire discussion without any changes to his remarks–also unusual in the Chinese context.”

Mr. Li is asked about the QE policy of the Federal reserve and says: “It is QUITE EASY for one to introduce QE policy, as it is little more than printing money. When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.” The interviewers ask Mr. Li if China will be tempted to devalue the renminbi: “Historically, Beijing has resisted the temptation to enter into competitive devaluation, most notably during the 1997-98 Asian financial crisis.”

This is categorically false  because China DEVALUED its currency by 50% on January 1, 1994, the day that NAFTA officially began (again everything is political). It is interesting that Mr. Li mentions the Asian financial crisis because although China did not intervene to weaken the YUAN it did push President Clinton to have the U.S. Treasury intervene to support a weakened YEN by buying BILLIONS of the Japanese currency as Bill Clinton was heading to China. (See YEN in June 1998.)

The Chinese Premier also states in the interview: “We don’t want to see further devaluation of the Chinese currency because we can’t rely on devaluing our currency to boost exports. We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war. And if China feels compelled to devalue the renminbi in this process we don’t think this will be something good for the international financial system.”

Now, the Chinese dropped its reserve requirement ratio (RRR) by 1% over the weekend after the G20 meeting. This was the largest drop in reserve requirements since the height of the global financial crisis in November 2008. The question for all investors: Was China sending a message to the markets and developed market governments that it will not allow the renminbi to be strengthening as the ECB and Japan continue printing money which results in a weakening of their currencies? If it was a message what impact will it have on the FED, ECB and BOJ? Is there any wonder why the tagline of 2+2=5 is the backdrop to Notes From Underground.

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7 Responses to “Notes From Underground: The G20 Is as Shaky as a “Fiddler On A Roof””

  1. asherz Says:

    When some of the major exporters are in a competitive devaluation race to the bottom, maintaining high moral or fair standards leaves the latter ultimately at the starting gate. In diplomacy, national interests take precedence. In the economic world the same ultimately holds true. When Bretton Woods came to an end in August 1971, the restraints for fair trading practices was now left to suasion and good will. With the buildup of tens of trillions of dollars in global debt built up in the last 40 years, and the fragility of the financial structure now on very shaky grounds, it has become increasingly “every man for himself.” China will not be the sucker in the enfolding poker game going on.

  2. David Stewart Says:

    I have been reading yra’s blog for quite some time and find it extremely enlightening to me. Could Yra or others suggest some books for me to read to increase my knowledge of currencies and how they work and interact. I have read Soros’ Reflexivity book but that is about it. I just looked on Amazon and it looks like Rickard’s The Death Of Money would be a good start for me. Any advice on where to turn would be greatly appreciated. I am an index option trader and voracious reader.

  3. Rob Syp Says:

    Do you have any comments about the flash crash outcome? It’s amazing they are pinning it on one guy in England. One thing that doesn’t make sense is why it’s taken this long to have this information released since a computer record of all the trades exists.

    Chutzpah to it’s finest that someone pulled this off until today.

  4. Kevin Says:

    Interesting thoughts Yra – tough times loom for capital in the years ahead, under the guise of fighting organised crime the offshore havens have been brought to heel. Next comes the conscription of capital to satisfy political populism (hat tip Russell Napier), negative real rates, prescribed assets and capital controls all have arrived or loom in the near future.

  5. Mark Gsrber Says:

    As Tevye said,
    “If I were a rich man…”

  6. Chicken Says:

    Great movie! Given the similarity to a football game, we should be able to predict the FED’s barking orders.

  7. Chicken Says:

    One question though, with the trade agreement talks heating up, will eurobanks need to raise reserves to meet new trade agreement requirements?

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