from The Great Debate UK:
Double dip a done deal?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
Earlier this week the S&P 500 was down 15 percent from its April 2010 high. The ongoing debate on whether the U.S. economy is poised for a double dip recession can be linked with these falls.
At present there is insufficient evidence to conclude that the U.S. economy will fall back into recession, though there are signs that the recovery could be losing momentum. A key question is whether the adjustment in asset prices seen since the end of April has been appropriate.
Proponents of double-dip imply that asset prices may have further to fall. In contrast, die hard bulls suggest that equity valuations are looking cheap. In the past few sessions, the bulls have been gaining the upper hand.
The reining in of government fiscal incentives and in many cases the implementation of austerity measures suggests that economic growth in most of the developed world will be constrained for the next few years.
The release a month ago of the much worse than expected May U.S. Labour report was followed by a bout of poor U.S. housing and confidence data that had the effect of triggering a wide scale debate about the prospects for double dip recession in the U.S.
from The Great Debate UK:
Women on course to control larger proportion of wealth
- Jane Foley is research director at Forex.com and blogs regularly for Reuters Great Debate. The opinions expressed are her own. Reuters will host a “follow-the-sun” live blog on Monday, March 8, 2010, International Women’s Day. Please tune in. -
Projections indicate that by 2050 the world’s population will stand at around 9.2 billion, up from around 6.7 million at present. The vast majority of this increase will be in the developing world. In developed world countries populations may start tapering off after 2025.
It seems likely that this explosion in population in the developing world will do nothing to address the fact that that per capita wealth is massively skewed towards the developed world. Using World Bank data for 2000, the average per capital wealth in the top 10 wealthiest countries is a staggering 170 times greater than the average in the bottom ten. Demographics in the developed world are defined by low fertility and low mortality rates. This translates into an ageing population. Added to this mix is the fact that male mortality rates are higher than female in the developed world. As a consequence, as these populations age they are becoming predominantly female. It follows that women are on course to control an increasing proportion of the world’s wealth. Reports that suggest that women are responsible for buying 80 percent of household goods in the U.S. will not be a surprise to the seasoned shopper. Over the past decade or so it appears that the advertising industry has been waking up to the notion that women’s responsibilities stretch further than making decisions on washing powder.
A recent U.S. NBC/Universal poll shows that women are just as likely to want to be involved as men in all stages of buying a car. The same poll showed that 46 percent of female respondents were the family’s breadwinner. While there is little argument that women are well practiced at making consumption decisions, there is less clear evidence to suggest how well they behave as investors. By definition a person’s decision to spend implies a decision not to save. Consumption and investment are rigorously linked. Over a person’s life-cycle a saver will, on retirement, eventually fall back on her savings.
The retirement of the baby-boomers (born between 1945 and 1964) could have a huge actuarial impact on the stock market and other investment vehicles given the increased potential for drawdowns. Just as the demographic structure is important, it is also possible that the increasing proportion of women in populations of the developed world may also have an influence on investment vehicles. There is plenty of anecdotal evidence and some studies that suggest that women are more researched and less impulsive investors then men; a fact that some surveys attribute to women being, on balance, more risk-averse. An interesting offshoot of the financial crisis was a discussion that male dominance in trading rooms and board rooms led to excessive risk taking that may have been countered with a female influence.
It could take decades before women have proportional representation on senior management committees, so this theory is unlikely to be tested for some time. More timely results may come from how women approach decisions on their personal investments. Clients of Forex.com are predominantly male, but during the course of 2009 the percentage of female customers increased by 50 percent.
from The Great Debate UK:
Greece loses a major incentive to stay within EMU
-Jane Foley is research director of Forex.com. The opinions expressed are her own.-
Germany’s Finance Ministry this week denied a report in Le Monde that Germany, France and other countries were working on a package to rescue Greece. It seems that for now the official line from the grandfathers of European Monetary Union is that Greece can sort out its own budget deficit. The official line from the Greek government is much the same; it continues to maintain that it doesn’t need a bailout.
The problem with this is that this lacks credibility. The blowing out of the yield spreads on Greek government bonds over bunds and the price of credit default swaps are evidence of that. In the months after EMU, the 5 year Greek-bund spread was less than 200 bps. This week it was over 400 bps. Unless the impact of bond yields can be contained Greece loses a major incentive to stay within EMU.
As with many of the less well fiscally managed countries in the approach EMU in 1999, Greece benefitted hugely from convergence trades. Technically, the spread between Greek bond yields and Germany’s should have closed only after budgetary reform led to a much smaller budget deficit.
In practice what happened with many countries is that the market pre-empted the convergence trade and the countries which had previously suffered from high debt maintenance costs saw the burden of financing their deficits decline markedly. In turn the savings made on financing the deficit hid the fact that true budgetary reform was in certain cases avoided. Years of strong growth allowed the government in Greece to get away with it. That the recession has uncovered the cracks is not really a surprise.
While EMU offers Greece many political advantages, the question now must be can it afford to stay within EMU? It is no longer benefitting from German-like bond yields and it is suffering the pressure of what is still a very strong exchange rate. It is not without precedent that a country can turn its fiscal situation around. Sweden’s experience in 1994 is a very good example of this. Canada also suffered years of austerity in the 1990s and transitioned its economy into one which was better positioned than most to cope with the latest recession.
Ireland also appears to be swallowing the bitter bill of budget reform. What makes Greece different is that it is highly questionable as to whether the electorate have the stamina to suffer reform. The farmers have this month been blockading roads; the risk of rising social discontent is high.
I am not an economist but surely such abail-out would set an unhealthy precedent. How could the EU respond if Spain’s and later Italy’s dire problems brought them begging at the ECB’s door in the same way?
from The Great Debate UK:
Tides may turn in the forex market into 2010
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The final weeks of 2009 have brought a sense that tides may be turning in the foreign exchange market reflecting broader developments in the global economy. The predominant changes relate to the dollar.
December’s 5 percent recovery in the USD index is linked to an improved outlook for the U.S. economy.
There are risks to this optimism, but short dated U.S. yields have pushed higher since late November allowing the dollar to shrug off the downtrend that characterised it during 2009 and potentially embark upon a cyclical recovery; at least against some currencies.
Better U.S. economic data in early December couldn’t have come soon enough for the Japanese authorities. In late November USD/JPY had fallen to a 14-year low.
Having proclaimed the economy to be in deflation the Japanese government openly pressured the Bank of Japan to take further supportive policy measures.
The Bank announced an emergency credit facility and subsequently stated it will not tolerate a negative inflation rate. This, combined with a rise in short dated U.S. yields, has allowed the JPY to take back the mantle of favoured funding currency from the dollar. The downtrend in USD/JPY that has been in place since mid 2007 may be turning.
from The Great Debate UK:
Development of the risk trade
- Jane Foley is research director at Forex.com. The opinions expressed are her own.-
A willingness to differentiate between risk on a country or at a regional level is an important part of the repair process in financial markets.
Credit worthiness is at the core of any assessment of risk and naturally credit worthiness can sort "risk" into a hierarchy which should be instrumental to the pricing of assets and currencies.
At the start of this year, fear and uncertainly herded investors in and out of "risky" investments fairly indiscriminately. Even though the overall rally in risk since the spring suggests that broad based fear has been dispersing, strong correlations between some of these "risky" assets persist.
Forecasts of slow levels of growth for most of the G10 in 2010 suggests that there are still a few more negative shocks in store for the markets in the coming months.
That said, reduced levels of fear should allow fundamentals including assessments of credit worthiness to play a greater part in asset allocations.
from The Great Debate UK:
2010: the year of fiscal clean up
- Jane Foley is research director at Forex.com. The opinions expressed are her own. -
At the height of the financial crisis few argued against the need for a huge fiscal and monetary policy response. As a result the global economy has moved away from the precipice. For many governments 2010 will bring a different kind of precipice, this will be the year in which many electorates will be made to start paying for their governments’ huge fiscal binges.
Certain countries will enter this process severely disadvantaged. Earlier this year UK debt was singled out by S&P for a possible downgrade. This week Moody’s commented that UK debt along with that of the US will test the boundaries of its top AAA rating.
The UK stands with the U.S., Ireland and Greece as being one of the few economies likely to register a double digit budget deficit/GDP ratio this year. Fitch’s downgrade of Greece this week has propelled it into the spotlight. This news followed the decision from S&P to put its sovereign rating on negative watch.
The news forced Greece’s Finance Minister to reassure markets that Greek bonds are accepted by the ECB after concerns rose over whether it would meet ECB collateral eligibility once temporary "emergency" rules revert to normal.
Some commentators have started to talk about sovereign default but this is not realistic within the G-10. Others believe that governments will deliberately inflate away the value of their debt. While this is also unlikely in a world where central banks tend to be independent and credibility can take decades to restore, it may also be also be hard to achieve in the immediate post crisis environment.
from The Great Debate UK:
Asia’s exchange rates set for centre stage
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
November meetings of leaders from the Group of 20 industrialized nations may not have had exchange rates on the agenda, but the notes prepared by the International Monetary Fund included some meaty foreign exchange references.
The first is the view that although the dollar has moved closer to medium-term equilibrium it “still remains on the strong side”. The second is the (widely held) view that the dollar “is now serving as the funding currency for carry trades” which has contributed to upward pressure on the euro.
The third was the acknowledgement that the Chinese renminbi has depreciated in real effective terms and remains significantly undervalued from a medium-term perspective. To deal with the latter the IMF prescribed the usual recipe; namely that “exchange rate appreciation would help limit capital flows” and “facilitate a shift towards domestic consumption that is needed in many emerging economies, notably those with large external surpluses”.
None of the points put forward by the IMF on foreign exchange are ground breaking. However, the fact that the IMF judged it appropriate to outline these issues ahead of the G20 meetings is suggestive of the economic and thus political relevance of these issues. China’s exchange rate peg is clearly at the forefront of these issues.
Also significant is the IMF’s mention of the upward pressure on the euro, which could be seen as acknowledging that the euro (along with the yen) is bearing the brunt of the dollar’s downward adjustment. By recognising that the dollar is “still on the strong side”, the IMF may be warning that the upward pressure on the euro may have further to run.
Now that the euro/dollar is back at 1.500, the market will again begin to wonder whether at some point the authorities may act to stem the appreciation of the euro/dollar. Intervention in euro/dollar cannot be completely ruled out but it remains a remote possibility because it would avoid the real issue. The dollar’s decline is being driven by inflows into higher yielding markets which is unlikely to be turned around by intervention in euro/dollar as long as the market is forecasting low Fed rates and as long as risk appetite holds. The rise in the euro vs the dollar is merely a symptom of these flows but the appreciation of the effective euro (and that of the yen) is being compounded by the fact that as the euro rises vs the dollar it also rises vs the renminbi. At present, the effective euro exchange rate is creeping back to its December 2008 high which represents an all time high. Rather than seek to rebalance euro/dollar, officials should be increasing pressure on China to address its policy regarding its exchange rate.
I am not so sure that investors in Asia are so foolish to allow asset bubbles. With the amount of people and businesses around, the liquidity and currencies must be chasing bargains like mad.We need a cross-rate table to assess things properly. Datastream, a Reuters service, last week clearly indicated that this yuan/renminbi hysteria is unfounded.Carry trades in any forms a small portion of GDP’s, so let’s just relax.
from The Great Debate UK:
Is a bubble burbling in financial markets?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.
A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.
If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.
Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.
In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for "risky" currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.
This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.
Jane, since you assert that the demand for crude was flat while the price was rising, a plausible explanation would be that the whole production curve has been elevated to compensate the loss in US$ value. I think that conditions for spotting a bubble formation stages should be investigated in correlation with the level of affordability for the end consumer. The housing bubble was predicted 2 years in advance, based on this kind of approach.
However, in repeated statements, Middle East suppliers were not shy spelling out that their comfort zone prices were between US$75 and US$80 when the barrel was hovering around US$60. In very short time, prices on the market have been elevated to a plateau of US$80, with no apparent changes in observable factors concurring in price formation. Therefore, what is the mechanism of translating a statement of desire into effective pricing in a market deemed free?
from The Great Debate UK:
Slow growth and deficit stem lure of dollar
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The U.S. dollar may have found support this week but the USD index remains at a 14-month low.
The impact of the financial crisis in drawing buyers to the "safe-haven" dollar has in effect been almost cancelled out by the healing in risk appetite. The dollar looks to have re-embarked on the downtrend that had been in place for more than two years prior to the start of the financial crisis, only now the U.S. fundamentals have arguably deteriorated further.
Slow growth and a hefty budget deficit are likely to hamper the attraction of the dollar for some time. That said, there is a huge invested political interest in ensuring that any further declines in the dollar remain orderly.
The weakness of the dollar has already prompted some Asian countries such as South Korea and Taiwan to intervene in order to prevent the appreciation of their currencies impacting competiveness. This action can be viewed as a protest against the renminbi-dollar peg and a guard against losing competitiveness to China.
As the euro rises against the dollar, it is also rising against the renminbi and -- spurred on by the actions of other Asian central banks -- the chances are that it will continue to appreciate against a host of other Asian currencies.
Since the start of last year, the euro has risen by 37 percent against the South Korean won. In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.
“In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.”
Of course not. What she wants is most of other major currencies also rise against the dollar. This way the US gets to depreciate its currency in a more controlled manner, a preferred course given the dollar MUST be depreciated anyway. Therefore it is the task of G20 to manage a coordinated currency rise against the dollar, so the their own competitiveness is maintained. Doing this requires the best of G19 wisdom. G19 because the US has already decided on a course of depreciation and it will do it with or without G19 cooperation.
from The Great Debate UK:
Whose money will prevail as reserve currency?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
If there is one foreign exchange story that will run and run it is the one about the U.S. dollar (USD) and its future as the world’s dominant reserve currency. The discussions on this topic have at least brought some agreement, namely that there is no clear alternative and therefore there can be no quick fix change. That said, much uncertainty remains as to what can, if anything, eventually replace the dollar.
The basis for questioning the USD’s position as global reserve currency stems from its declining value and its "poor" fundamentals. The dollar index is currently trading close to where it was 14 mpnths ago, ahead of the financial crisis. At that point the USD had been on a downtrend for over two years. The widening in the U.S.’s budget deficit this year has worsened the fundamental backdrop and drawn attention to its "twin deficits". This has made creditor nations nervous.
So, how bad are these fundamentals?
The U.S. current account deficit this year has actually improved. However, once the U.S. recovery gets underway, many expect to see the current account widen again. Textbooks suggest that a current account deficit should lead to a downward adjustment in the currency which will help address the imbalance. This is not always the case. Australia presently has a current account deficit of around 4.5 percent of GDP and the effective Australian exchange rate has rallied by 27 percent since January 1, 2009.
Current account imbalances, while always a potential currency negative, only weigh if international savers become less keen to fund it. Investment decisions will be determined by other factors such as relative growth and interest rates, political stability and fiscal coherence. A huge USD negative this year has been the widening in the budget deficit to potentially 11 percent of GDP from 4.7 percent in 2008. This implies huge bond issuance.
So much has been written and debated about this, Rolfe Winkler has a very informative Lunch Time Link of yesterday to The Economist.
I am going to be a real accountant and move away from supply and demand principles.
Why do we not simply add public and private sector assets (+ off-shore)together, subtract combined liabilities, remove double counting upon this consolidation, thereby calculating owners’ equity. If we are short, we revalue the assets and create a realistic non-distributable reserve.
For good measure, let’s convert it per capita to determine the equity value per citizen and repeat the exercise for the G20.
That might cause some people to jump from the Green Back onto the Hairy Back.
