Must One Be Bearish About China's Stocks and the Yuan?

Yuan Devaluation? Think Again. 10/10/2015 12:05AM Isabella Zhong asks Gavekal's Louis Gave talks about China's correction, what's ahead for the yuan, and why he likes Chinese airport stocks in this October 10th, 2015 video:

The Yen's Down; the Nikkei's Up

The Nikkei 225 jumped nearly 4 per cent on Wednesday, Since the financial crisis, thaat is its tenth best day since the financial crisis. 

In this four minute, nine second video, the FT's investment editor, James Mackintosh, attributes this primarily to the weakening of the yen. 

Careful: the return recently in $s is not the same as that in ¥s.

 

Turmoil, Curriencies, & Banks

The Financial Times  reports on currency movements and the effects on banks in these two videos:

Currency traders flex their muscles

According to the FT, " [a]s the world's reserve currency spreads its wings, many emerging markets and commodity currencies are getting caught in the downdraft of the risk-off trade in favour of the US dollar as a safe haven." (2m 10sec)

Dollar deluge shores up banks

In this second video, the Ft makes a crucial distinction, to wit: "The promise of unlimited dollars from central banks has buoyed shares in Europe's banks. However, as James Mackintosh, investment editor, warns, the liquidity worry may offer relief but the underlying solvency threat of sovereign default remains." (3m 43sec)

Twenty Years of a Convertible Ruble.

For approximately 500 years the Russia has used the ruble as its currency. Since the Soviet Union's fall in 1991, the country has undergone some drastic changes, including the ruble. After the fall the Russians focused on the challenge of converting their centrally planned economy to that of a market based economy with an emphasis with global integration. In 1991, the USA and the IMF recommended the economy undergo a radical “shock therapy” approach to market oriented reform. Rather than kick starting the Russian economy it led to collapse. Millions fell into poverty and corruption and crime grew rampant.

Hyperinflation resulted from the removal of the Soviet price controls. There were monumental difficulties in actually implementing the fiscal reforms. The govenment depended heavily on short-term borrowing to finance its budget deficits from 1991 until the 1998 financial crisis. These financial problems were exacerbated by low prices for Russia’s major exports a lack of investor confidence. The led to a falling ruble, a weakened banking system, and the constant threat of runaway inflation.

Despite these ongoing economic difficulties Russia and its ruble continued to struggle forward, claiming small victories along the way. In 2000, Russia successfully upheld its external debt obligations in addition to making a large advance payment of principal to loans from the IMF and building up its own Central Bank reserves. In 2002 the Russian government successfully assumed its payment of roughly $14 billion in official debt payments coming due. It was able to accomplish these feats through a sound government budget, improving trade, and substantial current account surpluses.

The current account surpluses caused the ruble to appreciate rapidly in value. However given its role in Russia’s exports, the country and the economy depend heavily on the price of energy. The 2001 U.S. recession and the global slowdown after the high tech burst caused energy prices to fall. In 2002 the G8 nations cancelled $20 Billion of the old Soviet Union’s debt. They hoped this would induce Russia to use these savings to safeguard Russia's nuclear and other dangerous materials from terrorists.

In 2004 the Stabilization fund of the Russian Federation was established and integrated into the federal budget as a safety net against falling oil prices. This was aimed at keeping the ruble stable through turbulent times in the energy sector.

The battle for economic stability lasted for more than half a decade. However, in 2007, Russia achieved one of its goals when the IMF certified the Russian economy had achieved macroeconomic stability.

In 2009 Russia’s GDP grew at its fastest since the fall of the Soviet Union. This meant that Russia and its ruble had officially overcome the consequences of the 1990 recession and economic collapse. Throughout all of this the ruble has been under the strains of inflation, although unemployment was cut nearly in half from 2000 to 2007.

In 2011 the upheaval in the Middle East has provided Russia with higher prices and increased demand for its energy exports as it helps to fill the gap left from reduced production in the Middle East. This will hopefully bring welcomed news for the Russian economy and its ruble.

The ruble has improved much more than Russian politicians and laws so that investors having greater faith in the currency than the integrity of its government.

-Stephanie Giberson

Treasury Securities ar ethe Risk Free Asset...For Now

On Ft.com, James Mackintosh, investment editor, explained in a May 27 2010 video how the dollar remains the world’s reserve currency despite the enormous US budget deficit. (1m 48sec)

But we can only print dollars to pay off our debt if countries take those dollars.  Can we fool all the countries all the time?

Can the BLS Move the Dollar? If So, Which Way?

On June 3rd, 2010, James Mackintosh, investment editor for the Financial Times, looked forward to the Bureau of Labor Statistic (BLS) monthly employment report from the US. He discusses how interest rates and the strength of the economy inter -react with foreign exchange markets in determining the value of the dollar. (2m 15sec)

Money Illusion

March 3 2010  One of the strongest forces behind the rebound in stock markets may be money illusion. People tend to think about investments in nominal terms (without taking into account inflation), and in terms of their own home currency, says John Authers in this FT.com. (2m 33sec)

The Recovery Is On! Fair Dinkum!

By MarketWatch's Myra P. Saefong reports Australia's gross domestic product is up in the first quarter and in comparison with last year's first quarter.

She writes, "The nation's GDP expanded by seasonally adjusted 0.4% in the first quarter, both in comparison with the same quarter a year ago and with the fourth quarter," citing the Australian Bureau of Statistics.

The All Ordinaries gained 62 points going over 4,000 for the first time since November. Hallelujah!

The Aussie dollar is also up. Ms. Saefong reports "The Australian dollar also strengthened, with one Australian dollar buying 82.26 U.S. cents, up from the previous close of 82.07 U.S. cents."

In the fourth-quarter, Australia's GDP dropped 0.6%, the first drop in eight years. Apparently the Aussie national income accountants do not report growth rates in seasonally adjusted annual rates annualized. It makes the numbers less dramatic.

"The bureau said that growth on the expenditure side over the past four quarters was driven by household spending and by exports, offset by a fall in inventories."

Disclosure: your correspondent has shares in an Aussie closed end fund.

What does it mean?

Australia's economy is tied to Asia. When the Chinese dragon stokes up its furnace, Australia and Brazil feed the beast the inputs that fuel its exuberance. Thus Australia's economic growth and the Aussie dollar are leading indicators of the globalized economy.


This implies that the world economy is recovering. Further dramatic confirmation can be found in the Baltic Dry Index, an indicator of shipping prices. As trade picks up, it costs more to hire a ship to transport it. The index has increased four-fold since December returning to the boom levels of 2004-6 and soaring toward the bubble levels of mid-2008.

Are the Credit Crisis and the Unrelated?

If you think the answer is "no," Reuven Brenner connects the dots for you.

America's Inflation Slayer: the Dollar Crisis? "We're in it."

Paul Volker tells us what no one is willing to say, least of all at the Fed: there is a run on the dollar. The editors of the Wall Street Journal agree: "Mr. Volcker, a former Fed chief, has a well-earned reputation for straight talk, but there is always strong institutional pressure not to second-guess one's successors at a place like the Federal Reserve. This makes his speech to the Economic Club of New York all the more remarkable for the sharp questions he raised about inflation, Fed independence and moral hazard."

In that speech, Mr. Volker, who defeated double digit inflation in the U.S. during his chairmanship from 1979 to 1987, was asked whether he was still predicting a dollar crisis. He responded, "You don't have to predict it. We're in it."

The Journal's editors put this in context: "On the dollar, Mr. Volcker's blunt talk of crisis is a welcome tonic to the devaluationist consensus that now dominates Washington. The world has been staging a run on the greenback, with damaging results if it continues. Mr. Volcker noted that when "concerns about recession are rife," the central bank will be tempted to "subordinate the fundamental need to maintain a reliable currency" to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation."

Having paid such a price to kill the dragon of inflation that debilitated the U.S. economy in the 1970s, it would be tragic to resurrect that monster today.

The Subprime Mortgage Crisis, Recession, and Citibank

This morning's Wall Street Journal is full of opinion and commentary on our favorite topics.

Alan Greenspan dissects "The Roots of the Mortgage Crisis." He thinks that if it had not been subprime mortgages, then something else would have precipitated a crisis after risk premia had fallen so low.

Also on the Opinion Page, Alan Reynolds analyzes the dollar in his commentary, "Interest Rates and Dollar Fundamentals" and Martin Feldstein advises on "How to Avert Recession."

Meanwhile, Citicorp, parent of Citibank, has decided that Vikram Pandit and Sir Win Bischoff should stay on as CEO and Chairman, respectively. They were both acting in those jobs. You can read about it in Robin Sidel and David Enrich's article. The big question remains: "Can a universal retail/wholesale bank be created like a hothouse plant through mega mergers and acquisitions?" I have my doubts. That certainly not the way the House of Morgan was created. On October 16th, Ms Sidel and Jeffrey McCracken reported increased skepticism that Citi's universal banking strategy was working.

True Blue Growth: The Australia's Economy is Up 4.3% Over a Year Ago

Bloomberg reports that Australia's GDP is grew .9 percent over the first quarter and is up 4.3% from a year ago. The Aussies do not annualize the quarterly growth rates as does the U.S. Commerce Department. I suspect they have it right down under: the gyrations in the seasonally adjusted annual rates we report on GDP growth confuses more than it enlightens.

Australia's expansion is in its sixteenth year. They have been doing well ever since I first arrived in 1991 and continued after I left. (Post hoc, ergo propter hoc?)

Investment spending and exports are leading the parade. The commodity boom and particularly China's insatiable appetite for raw materials is driving growth. The U.S. is no longer the lone leader of the world economy:

Bloomberg reports "The Australian dollar climbed to 82.45 U.S. cents at 1:36 p.m. in Sydney from 82.07 cents immediately before the report."