from Commentaries:
Long on volatility, short on meaning
It's hard not to be cynical about what the markets are supposedly telling us this week.
Don't get me wrong, I think markets can be a good barometer for sentiment and a leading indicator for trends before they bubble to the surface.
But their behavior this week suggests that the few traders and investors working during these dog days of summer are more interested in pushing prices around for short-term gain than making a bet on where the economy and financial markets are heading.
It's nothing new that trading desks are thinly staffed in the last weeks of summer, but after last year's rude interruption of summer holidays, more are taking advantage of the relative calm this year to soak their feet in the ocean rather than man the phones.
That's caused some interesting cross-currents that are making the message a bit of a muddle. Today, for example, oil prices rose early on hopes of an economic recovery while gold, a haven for those seeking a safe harbor, marched toward $1,000 per ounce as investors grew more cautious.
And Treasuries, after two days of solid gains despite better than expected economic data, fell today as investors continued to look to the stock market rather than data for clues.
Treasury yields, in fact, had been threatening to break back to lows seen in May even though the government has flooded the market with new notes -- $70 billion more to come next week -- and the economy has improved markedly since then.
China cuts Treasury holding to fund foreign deals
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
Please don’t call it a liquidity crunch, but it rather looks as though China might have had to sell a sliver of its vast hoard of U.S. Treasury paper to fund its private sector’s big overseas foray.
China’s holding passed $800 billion in May, sparking speculation that it could reach $1 trillion within a year, but the net June figure, published on Monday, showed a 3.1 percent drop to $776.4 billion, the biggest percentage fall in nearly nine years.
It’s clear that China has been keen to use more of its reserves to secure strategic resources supply overseas, as well as diversifying them into emerging markets such as Africa to help create demand for Chinese exports. The unwinding of global imbalances also means China might have fewer dollars to invest, as its July trade surplus more than halved from a year earlier.
In the past, almost all outflows from China come from the government, which by default put the money into U.S. Treasuries. But now the private sector needs more foreign currency.
Just this month, China’s Yanzhou Coal Mining agreed to buy Australian coal miner Felix Resources for $2.9 billion, and Sinochem Corp. spent $878 million buying British oil and gas explorer Emerald Energy.
The government itself also seems to be getting more adventurous. Its $200 billion sovereign fund finished 2008 with almost 90 percent of its assets in cash, but is determined to put more money to work this year.
Another reason? China in order to run a huge surplus with the US is required to leave a certain amount of the money here. It’s trade surplus is now down so it can move it out. This doesn’t mean it didn’t want to all along.
No U.S. bounce from China’s safety net
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Offer a U.S. Treasury secretary visiting Beijing one wish, and he will certainly opt for a revalued Chinese currency. Offer a second, and the probable choice would be a strengthened social safety net.
Timothy Geithner followed bipartisan tradition when he recently called on the Chinese to strengthen their social benefits. Indeed, it has become an article of faith that a solid welfare state will allow the Chinese to curb their abnormally high savings rate — which is at the heart of the global economic imbalance.
Luckily for Geithner, this consolation prize appears within reach. China’s spending on welfare rose 27 percent last year.
Particular excitement has surrounded China’s plan to provide near-universal healthcare by 2011. Free from the need to stockpile for a medical emergency, the Chinese people will be more able to splurge on consumer goods, it is thought.
Jim O’Neill, Goldman Sachs’ chief global economist and the doyen of China enthusiasts, argues that this is perhaps the most important public policy in the world at the moment.
Yet while welfare reform is almost certainly good for the Chinese, it may do precious little for the United States. Hopes for China on this front are based on half truths.
Mr. Swann, this is one of the most incisive analyses I’ve read with nearly a quarter of a century living in Asia, 4 in mainland China and 4 in Macau (while it still belonged to Portugal).
When I lived in Tianjin 1985-86 and Beijing 1986-88, the commorn street intelligence held that a typical worker saved around 40% of his or her income, partly because there wasn’t all that much to buy and partly of the then-extant cradle-to-grave system that provided for practically everything. While I’m certainly no expert on anything at all to do with economics, that seemed to be borne out by Chinese I knew, including the family of a lady from Beijing I married. Her Mother save 35-40% of her salary, while her Father usually hit the 50% range (but, then, his salary was considerably higher than hers). Other friends, colleagues, and students (I taught in universities) told me comparable stories. I even got into the act myself after marrying, knowing that we would be going to the U.S. for further studies for my wife, and in about 19 months, earning the equivalent of $400/month, I saved about $2750. But even I had few expenses, though I didn’t get *quite* everything a Chinese citizen did.
So, I’m a bit puzzled by the percentage saved as cited in your article. True, what I read was in the popular press, and my direct experiences with Chinese were (1.) only anecdotal, and (2.) univerfied — I never asked anyone to show me their bank book or to see the stash under the bed or whatever.
I returned to mainland China for nearly a year 1999-2000, and even that late my boss and his wife, both of whom worked, after about seven years of marriage (and having a daughter along the way) saved enough money to buy multiple household high-end goods (television, refrigerator, sound system, etc.), a late-model used car, and a late-model used motorcycle — AND an apartment measuring about 750 dquare feet. And their families both were dirt-poor, so it wasn’t the daddies forking over a chunk.
Anyway, I thoroughly enjoyed the article and learned some things from it — thanks!
Fed sets out exit strategy
– John Kemp is a Reuters columnist. The views expressed are his own –
Intense criticism of the Fed’s role in the financial rescue program and the decision to triple its balance sheet, including monetizing a portion of the Treasury’s debt, has forced the central bank to issue an unusual defense of its actions (http://www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).
It attempts to placate critics by acknowledging the real risk of inflation, and marks the Fed’s first attempt to set out an “exit strategy” for ending quantitative easing and other credit programs once the crisis is safely passed.
The joint statement issued with the U.S. Treasury reflects “the common views of the Treasury and the Federal Reserve on the appropriate roles of the Federal Reserve and the Treasury during the current financial crisis and in future.”
The last time the Fed and Treasury were forced to reach such an agreed statement defining their respective responsibilities was in 1951. Over the previous 15 years, monetary and fiscal policies had largely become fused as a result of the Great Depression (with interest rates kept artificially low to support recovery, then abandoned as a tool of monetary management in favor of reserve requirements) and World War Two (with rates repressed to help finance the government’s massive borrowing program).
Even after the war had finished, the Fed held short-term interest rates at just 1 percent. Rates did not begin to rise until the start of 1948, and they were still at just 2 percent by the end of 1952 (https://customers.reuters.com/d/graphics/WARTIMEFINANCE.pdf).
Crucially, the Fed also enforced a 2.5 percent ceiling on long-term Treasury yields through open market operations to hold rates down and support the federal government’s massive wartime borrowing program and the need to refinance the debt at low cost. Precisely what the Bernanke Fed is now doing through its Treasuries purchase program.
Smart moves;
Question is will it work this time the same way it did over 50 years ago?
The fifties were a period of growth where a lot of pent up demand was satisfied, allowing the fed and treasury to release/distroy this hot air as needed without creating inflation.
How will this be possible today with lower growth rates?
I do not know the how much money was involved then, but I would think it will take a long(er) time this time. In my opinion, they are playing with fire here, but is there another choice?
How will the Fed get off its Tiger?
– James Saft is a Reuters columnist. The opinions expressed are his own –
The Federal Reserve and U.S. economy have two considerable risks now that quantitative easing is at hand: keeping the dollar from a disorderly decline and figuring out how to dismount from the tiger.
The Fed has cut interest rates to a range of zero to 0.25 percent and said it would use “all available tools” to get the economy growing again, including buying mortgage debt as well as exploring direct purchases of Treasuries.
While the central bank was at pains to distance its policy from Japan’s during its extended downturn, there can be no doubt that the dollar printing presses are and have been running and will pump out as much currency as is needed to avoid deflation and make credit available at a stimulative rate.
There is no question of the Fed not being able to re-ignite inflation in the U.S. economy; if they print money fast enough, prices will go up. The issue is more about the collateral damage possible when a major debtor nation takes these steps, even if it is doing it for all the right reasons in support of the best possible cause.
In the short term the risk is that foreign holders of the dollar and Treasuries are spooked by the whirring of the presses, and, reasoning that the Fed cannot fail in its quest to re-ignite inflation, decide to hold something less, well, risky.
Now of course in the current circumstances there may, for better or worse, not be that much of a dollar alternative for global reserve managers and investors and, seeing as how a rapid unwind in the dollar would hurt creditors, they may stick it out.
Actually if you pump money into companies to create products for non-existent markets, the end result is not inflationary. For instance if we paid auto makers $800 billion to upgrade machinery and restructure, the general idea is that the new products will be sold for less or at prices that are more competitive than in past years. When we pump money in banks, keeping competitors alive rather than letting them fail, we maintain a larger number of players going after the same market. That is actually deflationary. In effect we are financing slimmer profit margins. This means in the longrun the cost of repaying the stimulus will be much more painful than the stimulus itself. Times have changed. But we still keep harping on prehistoric concepts.
http://www.businessday.co.za/articles/Co ntent.aspx?id=81722