The odor of beggar thy neighbor was wafting through the global financial system as the biggest industry group in Norway voiced its concern regarding the appreciating KRONE. Shipbuilders and other industrial groups are complaining that high oil prices and an aggressive central bank are creating powerful headwinds to the nascent recovery. The Norwegian currency typically rallies as oil prices rise, but the Norge Bank’s efforts to get ahead of possible inflation is proving to be a double whammy in the world of soft global monetary policies. This problem will move to the fore as the flow of hot money continues to seek a better return than 10 basis points on U.S. T-bills and many other short-dated bank notes.
The China story took an interesting turn today as one of the top Chinese think tanks proposed that the YUAN be revalued by 10%. The Chinese Academy of Social Sciences (CASS), and one of its top researchers, Zhang Bin, advised in a published article in a non-official periodical that the YUAN reval should be imposed with a 3% annual cap going forward. Zhang said this is “a good strategy to protect China from the impact of short-term capital inflows.” Mr.Zhang added, “Now is a very good time. Foreign pressure will intensify this year and China should take an active strategy.” There was no official response, but this runs contrary to the public posturing of Premier Wen Jiabao’s view that China will not be pressured. This seems to be a proactive response to Bini Smaghi’s piece in yesterday’s Financial Times. Several Chinese researchers believe that a 10% move at this juncture will not be detrimental to exports and will be seen in a positive light. What will the beneficial tradeoff be for the Chinese? Goodwill and maybe the ability to pursue a global investment strategy unimpeded by false strategic concerns. Some clear-headed policymakers will need to prevent the tit-for-tat tariffs that are currently being enacted. A trade war will bring the fragile global economy to its knees, thus a small voice has been loudly heard today.
Japan presented us with a new finance minister, NAOTO KAN. The currency markets have interpreted this that the YEN will weaken as Mr.Naoto has previously talked about how a strong YEN was causing stress to a potential Japanese recovery. This was at odds with the retired finance minister’s view that the strong yen was not a problem as long as its rise was not too rapid. For the political ramifications of this appointment, we will direct you OBSERVING JAPAN.com, the blog of Tobias Harris, Yra’s son. We believe that Observing Japan is an important source of political Japan and should be referenced for breaking stories on the relations between Japan and the world.
Tonight we also wish to address a concept that we have used to analyze markets throughout the years we have traded. We look for investment clues to provide a barometer for changes that are or will be taking place. When we look out over the horizon, it seems that a valuable indicator for market performance can be found in the realm of private equity firms. Two large and well-managed private equity groups that are publicly traded are Blackstone (NYSE: BX) and Och-Ziff (NYSE: OZM). These two firms were under severe stress during the height of the credit crunch as their models could not have been more wrong for the times. Their business models were based on converting equity to debt, as they scoured the planet searching for “underperforming” firms that needed to be revamped. In looking at these two stocks, we are not making a statement about their methods but just noting the importance they have taken on as an indicator of economic health. If the equity markets have any real legs to them, Blackstone and Och-Ziff should be able to rid themselves of much debt as they move to IPO some of their privatized assets. The market will tell us how it feels through these actions so we believe that their stock price will be something to pay close attention to as a barometer. In addition, we will be watching as to whether or not APOLLO group is finally able to publicly list themselves in the U.S. If the private equity groups are unable to lift their debt burdens, we will be skeptical about the duration of this equity rebound and the implications it will have for other investments. Another positive for these stocks is that they have deep ties into the global SOVEREIGN WEALTH FUNDS, both as advisers and as investment partners so there is a great deal to learn from this theme. We will be writing about this more in the weeks to come.