From the WSJ:
KIEV—Petro Poroshenko declared victory in Ukraine’s presidential election Sunday after exit polls showed the pro-Europe chocolate tycoon won more than half the vote….
Read more at Crisis in Ukraine – Wall Street Journal – WSJ.com.
China’s export dilemna
Growth in value of exports from China has slowed to single figures since 2012. It will be difficult sustain current GDP growth if this trend continues.
The Harper Petersen index of shipping rates for container vessels, the Harpex, remains near its 2010 low, reflecting continued weakness in Asian manufactured goods exports (a rise in exports from Europe or North America would be absorbed by the high percentage of containers returned empty to Asia on the round trip).
Rising Australian bulk commodity exports reflect the disconnect between Chinese imports and exports, with vast investment in infrastructure and rising stockpiles of raw materials used to sustain economic growth. But diminishing marginal returns on further infrastructure and housing investment mean failed recovery of manufactured goods exports would lead to a hard landing.
A key factor will be the strength of the RMB against the US Dollar. Ambrose Evans-Pritchard suggests that China will meet strong resistance in its attempts to export its deflation to the West. Treasury’s forex report to Congress (April 2014) highlight’s sensitivity toward further exchange rate manipulation:
In China, the RMB appreciated during 2013 on a trade-weighted basis, but not as fast or by as much as is needed, and large-scale intervention resumed. The RMB appreciated by 2.9 percent
against the dollar in 2013. However, as a result of the depreciation of the yen and many emerging market currencies, the RMB strengthened more on a trade-weighted basis, with the RMB’s nominal and real effective exchange rates rising 7.2 and 7.9 percent, respectively. For most of 2013 the RMB exchange rate was at, or very near, the most appreciated edge of the daily trading band, suggesting continuous pressure for greater RMB appreciation. During 2014, however, the exchange rate has reversed direction, depreciating by a marked 2.68 percent year to date.There are a number of continuing signs that the exchange rate adjustment process remains incomplete and the currency has further to appreciate before reaching its equilibrium value. China continues to generate large current account surpluses and attracts large net inflows of foreign direct investment; China’s current account surplus plus inward foreign direct investment in 2013 exceeded $446 billion. The reduction in the current account surplus as a share of China’s GDP has largely been the reflection of the unsustainably rapid pace of investment growth. Finally, China has continued to see rapid productivity growth, which suggests that continuing appreciation is necessary over time to prevent the exchange rate from becoming more undervalued. All of these factors indicate a RMB exchange rate that remains significantly undervalued. Further exchange rate appreciation would help to smoothly rebalance the Chinese economy away from investment toward consumption.
The Chinese authorities have been unwilling to allow an appreciation large enough to bring the currency to market equilibrium, opting instead for a gradual adjustment which has now been partially reversed . The expectation that the RMB would continue to appreciate over time resulted in large and increasing capital inflows in 2013. The PBOC’s policy of gradual adjustment triggered expectations of continued appreciation, and resulted in large-scale foreign exchange intervention. China’s foreign exchange reserves increased sharply in 2013, by $509.7 billion, which was a record for a single year. China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8 trillion in reserves, which are excessive by any measure. This suggests continued actions to impede market determination.
In short, China has been buying US Treasurys as a form of vendor financing, allowing them to export to the US while preventing the RMB from appreciating to its natural, market-clearing level against the Dollar. The fact that they are attempting to disguise this manipulation, using third parties, means that Congress is unlikely to tolerate further suppression of the RMB against the Dollar and will be forced to take action.
Is China hiding its FX reserves in…Belgium? MT @michaellachlan A picture tells the story? pic.twitter.com/cTSwssLLKq
— Robin Harding (@RobinBHarding) May 20, 2014
Feared sales of US Treasury investments by China, leading to a collapse of the Dollar, are most unlikely and would be a death knell for Chinese exports. Reversal of capital flows would cause rapid appreciation of the RMB against the Dollar, up-ending China’s former competitive advantage and boosting US exports.
Even without a reduction of existing Treasury holdings, appreciation of the RMB against the Dollar and Euro appears inevitable. This would be disastrous for China, causing them to forfeit their competitive advantage in export markets. And without access to the level of technology and global branding enjoyed by their Western counterparts, Chinese exporters are likely to struggle to hold existing markets, let alone achieve further growth. With diminishing returns on infrastructure and housing investment, China could soon run out of options to stimulate its economy. And its path as a global economic powerhouse may well follow that of its predecessor, Japan.
Putin Wants Business as Usual. So Do Western Businesses. – Bloomberg View
Leonid Bershidsky writes:
Vladimir Lenin famously lambasted “bourgeois intellectuals” for taking “one step forward and two steps back.” Vladimir Putin believes in the opposite formula: Having taken two steps forward in Ukraine, he is now taking a step back.
Read more at Putin Wants Business as Usual. So Do Western Businesses. – Bloomberg View.
How Hitler’s roads won German hearts and minds | VOX
Interesting conclusion from Hans-Joachim Voth and Nico Voigtländer, writing at VOX.
Long before the Nazi regime committed its singular crimes, it had become remarkably popular in Germany (Evans 2006). Voting records from 1933 and 1934 reveal the effect of one factor that, according to many historians, boosted support for the regime – the building of the Autobahn. Using detailed information on the geography of road-building, we isolate the effect of construction on voting behaviour by analysing the ‘swing’ in favour of the regime over a nine-month period (November 1933 to August 1934). We find that opposition declined much faster where the new ‘roads of the Führer’ ran.
Direct economic benefits for residents in Autobahn districts may have played a role, but they were probably small. More importantly, the new roads provided concrete proof of the regime’s actions, delivering on its promise to get ‘Germany moving again’. Within a couple of months of taking power, a highly ambitious highway construction project was under way at 17 different locations all over the country, affecting more than 100 electoral districts. In other words, the visible progress of road construction made the regime’s ability to follow through on its promises salient for many Germans.
Combined with effective propaganda trumpeting the regime’s successes, the roads succeeded in winning the hearts and minds of many Germans. Nor were they the only ones to be impressed. When the US Army rolled into Germany at the end of World War II, one of the officers taken with the ease of transport on motorways was Dwight D. Eisenhower. When he became President of the United States, he lead the initiative to built the country’s interstate highway system.
Read more at Nazi pork and popularity: How Hitler’s roads won German hearts and minds | vox.
What Ukraine Crisis Means for Future of Europe | SPIEGEL ONLINE
Interesting extract from Spiegel interview with Prof. Timothy Snyder from Yale:
SPIEGEL: What motivates Putin?
Snyder: I think Putin is playing an all-or-nothing game, geopolitically speaking. He no longer cares about tolerable relations with the EU or about a solid relationship with Ukraine. Putin has opted for something else, a much larger project, to destabilize Ukraine and the EU. It’s an all-or-nothing game because there is no going back, now that he has embarked on this path.
SPIEGEL: Can he win?
Snyder: There are two options now: Either he achieves his goals, or the European Union achieves political unity and ideological stringency. It would have to define itself as Russia’s adversary and, most of all, develop a joint energy policy with which it could affect Putin. If the EU could do that, there would be radical consequences for Russia. Then Putin would have to fall back on China, and Russia would become China’s Ukraine.
via Experts Discuss What Ukraine Crisis Means for Future of Europe – SPIEGEL ONLINE.
Dow 1929 hoax re-visited
Some readers still believe there is a strong resemblance between the Dow 1929 crash and the current Dow Jones Industrial Average. I thought we had buried that hoax.
Take a careful look at the two scales on the right of the chart. The scale of the 1929 Dow shows a gain of roughly 200 to 375, or 88% in percentage terms. The scale of the current Dow shows a gain of 12000 to 16500, or roughly 38%. In short, the scales are not proportionate and have been adjusted to fit the two curves.
Next, take a look at the time frame of the chart, 1928 to 1929, and compare it to charts with a longer time frame. The curve in the 10-year period leading up to the crash bears no resemblance at all to the last 10 years (2004 – 2014) of the Dow. The chart time frame has also been cropped to display the best fit.
With this kind of careful analysis we could show a close correlation between the 1929 Dow and Justin Bieber’s record sales ……..or crop yields in Iowa.
Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs
Ambrose Evans-Pritchard reports the resounding success of Norway’s central bank in using macroprudential tools to take the steam out of a housing bubble:
if the Bank [BOE] wishes to contain credit, it should learn from Norway’s success. Instead of raising rates, it has used “macroprudential” tools. It cut the loan-to-value ceiling on mortgages from 90pc to 85pc. It forced the banks to raise to capital buffers further.
The Norges Bank has recommended a 1pc counter-cyclical buffer based on its view of what constitutes a safe level of credit growth.
Contrary to claims that these tools never work, they worked splendidly, as you can see from this chart today from HSBC’s David Bloom.
The RBNZ adopted similar measures and it is puzzling why the RBA, which faces an equal threat, is not doing the same.
Read more at Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs.
Ukraine crisis offers lessons in how to handle China’s ambitions
Chilling analysis by Simon Leitch of the use of force by Russia and China to achieve political objectives:
Because China and Russia are major powers with nuclear weapons, dangerous conventional forces and economic leverage, states seeking to deter them from territorial challenges lack credible threats. To address this they must learn the Cold War lessons of manipulating risk or forfeit the initiative to opponents.
This is a high-stakes game of chicken which could encourage smaller states to pursue their own nuclear deterrent and indulge in aggressive, irrational, North-Korean-style behavior in order to discourage aggression from their larger neighbors.
Read more at Ukraine crisis offers lessons in how to handle China's ambitions.
Is the market overpriced? Episode V
In my last post I concluded that the same factors driving rising inequality — new technologies and access to cheap labor through increased globalization — may also be driving a sustainable increase in corporate profits. While we may be understandably wary of “this time is different”, consider the following:
The rise of China as a trading partner over the last two decades.
Corporate profits at 11% of GNP suggest a new paradigm when compared to the historic (normal) range of 5% to 7%.
The decline in employee compensation as a percentage of corporate value added mirrors the rise in corporate profits.
And Robert Shiller’s CAPE, normally used to argue that the market is currently overpriced. If we stood in 1994 and looked at the range of CAPE values for the past century, we would no doubt have concluded that a CAPE value greater than 20 indicates the market is overpriced. In the last two decades, the CAPE only briefly dipped below 20 at the height of the global financial crisis. Now pundits argue that a CAPE value greater than 25 indicates the market is overpriced. Something has definitely changed.
Whether the change is sustainable, only time will tell. But one thing is clear. Of the 466 corporations who have so far reported earnings for the first quarter 2014, 77% have either beaten (68%) or met (9%) their estimates. Corporate profits are not in imminent danger of collapse.
Is the market overpriced? Episode IV
In my last post I said that, with interest rates, tax rates and real wages at historic lows, corporations are likely to make fat profits over the next few years and stocks remain reasonably buoyant. But at least one of these factors can be expected to change.
- Recovery of the housing market would cause the Fed to lift interest rates;
- Revision of the tax code by a President who can work with both sides of the House; or
- A dramatic fall in exchange rates placing upward pressure on wages as manufacturers regain export markets.
What I did not emphasize is that none of the above are likely to occur without a strong economic recovery — and the net effect of any change could well be a boost to corporate earnings.
What also dawned on me after reading The Inequality Puzzle by Larry Summers is that there may be a common thread. The impact of new technologies over the last two decades and access to cheap labor through increased globalization may have created a sustainable increase in corporate profits as a percentage of GNP. Could this time really be different? Only time will tell. I will be watching sales growth and profit margins over the next few years with interest.