Global Developments: Green Shoots?

Ray Littaua, a currency trader/stock investor, has been in the finance/mortgage banking field in San Francisco, California for the last 15 years. This piece was published in the May 25 edition of the BusinessWorld, pages S1/4 to S1/5.

In the last couple of months, we have seen the stock market rise, together with the increase in prices of commodities (including oil). Meantime, the forecast is that the US dollar, the world’s reserve currency, will go on a downward trend in light of a still faltering US economy, increasing unemployment, and the surge in the US budget deficit due to the US$800B allocation for TARP (Troubled Asset Reform Program).

The Fed is implementing a quantitative easing strategy (rapid printing of money) to finance TARP. The hope is for rates to remain low and create another refinancing boom. This surely leads to inflationary pressure that can drive down the dollar.

The dollar’s continuing slide has irritated China. China owns an estimated US$750B of US debt in the form of US Treasury Securities.  In other words, the US dollar’s downward trend will undermine China’s portfolio. China’s concern over the dollar’s decline prompted it to ask the G20 to stop using the US dollar as the reserve currency. But as expected, the G20 was not supportive of China’s appeal.

In response to the situation, China has orchestrated  “currency swaps.” The currency swaps refer to the use of local currencies to facilitate payment on the trade transactions between two countries, without need to convert the national currencies to dollars.

China has already partnered with six nations for the currency swaps, since the fall of 2009, in the hope of widening the acceptance of the yuan/renminbi (RMB) in Asia. China now has swap lines with South Korea, Hong Kong, Malaysia, Indonesia, Belarus, and, most recently, Argentina. These countries are now trading in the local currency with China; for instance, Argentina trades pesos for yuan in all China-Argentina trading, thereby widening the acceptance of the yuan/RMB.

For its part, China has allocated a US$585B economic stimulus package for housing, highways, airports and power grids. China’s infrastructure spending has already bolstered the price of base metals, fueling a rise in the price of commodities.  This in turn has resulted in the appreciation of currency values of commodity-based currencies/countries, such as Australia, Canada, and New Zealand.

India—another emerging world power from Asia—is also influencing global financial movements. With India’s election of a new pro-business, pro-reform government, its stock market has been pushed to levels not seen for some time. That rally has carried over to the Japanese stock market, which in turn has spilled over to Europe, and finally, to the US. Risk assets are on the move, the rally has really kicked into gear and stocks are off to the races.

All this has gotten the attention of leading financial economists and forecasters. Not in the positive sense, but in a sort of nonchalant and questioning manner. I myself couldn’t get a hold of this rally. What’s the rally all about? The prospects for future earnings are awful. Real unemployment is up over 16 percent in the US and even here, I just heard American Express will lay off 4000 employees.  And let’s not forget the closure of thousands of distributors for the Big Three US carmakers. Even the transportation sector, most specifically Railroads, which carries the bulk of goods and services in the US, is down 20 percent.

More, consumers are not spending since they are either unemployed and can’t find a job, or they are underemployed. So many are up to their necks in debt and can’t access their maxed-out credit cards like before.  They just have no spending money to allocate for non-essentials.

So the signs are not as encouraging as the stock market would like us to believe. But these stock market investors still hope that everything will be fine soon.  They interpret events and financial reports here and there as “green shoots.” I say brown for now.

Investor confidence, as you see, is tied up to the stock market, and as they say, reflects the economy of the country.  Caveat emptor: This incremental rise in prices is not tied to fundamentals. It is going to be the same traditional adage: P/E [price-to-earnings] ratios, my friend, will be the rule from now on.  We wait till the market gets its bull market run, maybe in a couple of years. Then we’ll be back to the same good old days of venture capitalists and future earnings speculation—and a lot of moolah to make everybody smile once again…

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