Euro, Greece, China and the Currency Stage
An interesting week for the markets. Apparently the Greece problem is solved…but no. If anything we have only hit the tip of the iceburg. Even according to Greek officials they will need more money shortly. And despite having what looked like a reversal in the Euro early in the week, tension set in once again by the end of the week. As a trader I don’t worry about the news at all in terms of how I place my trades…but it is very interesting none the less. Later I will address the technical outlook of the EUR/USD, but for now the follow tidbits I found quite insightful.
The following segment provides some perspective on the things shaping the future of our global economies. The excerpt is from:
The Daily Reckoning...Examining Stock Market Valuations: Brace for Turbulence By Dan Amoss
… Napier thinks that the catalyst to end the unsustainable status quo of the developing world financing US trade deficits will be inflation in the emerging markets. Emerging economies believe that they can export their way to prosperity, but they cannot. “40% of the world’s population has a great plan to get rich by selling stuff to 14% of the world’s population,” Napier observed. “That can work for several years, and it has – particularly if 14% of the world’s population is prepared to gear like crazy to buy all of this stuff.”
Now that US consumers are deleveraging, Asia’s mercantilist economic and currency policies aren’t as effective as they once were. These countries will not be focused on undervaluing their exchange rates forever. If aggressively debasing your currency were a guaranteed road to high growth and low inflation, paper money would have a much better reputation among historians.
The downside of this currency policy is that it can lead to inflation at the local level. Eventually, the supply of existing and new money will overwhelm the growth of productivity in China’s industrializing economy. These emerging markets will have to eventually allow currencies to rise to prevent inflation from getting out of control.
We’re seeing more examples of rising imported commodity prices hurting Chinese industry. The price of iron ore is soaring, thanks to China’s aggressive infrastructure investment and its suppressed currency. International iron ore markets are so tight that supply contracts are switching from yearly to quarterly pricing adjustments. The Financial Times this week reported on this evolution in the pricing of iron ore, which will feed through to higher steel prices: “The new price system will lift the cost of iron ore to Asian steelmakers to about $110-$120 a tonne during the April-June period, up between 80 and 100 per cent from the $60 level at which the 2009-10 annual contracts were settled.”
If China allowed its currency to appreciate, it would pay less to import iron ore and other crucial imports like oil. A strengthening Renminbi would increase demand for imported oil, which translates into more expensive oil for US consumers. A few years from now, Washington, DC may come to regret its push for China to appreciate its currency.
Napier also addressed the subject of Europe, Greece, and the Euro. He said, “The creation of a single currency is not an economic event, it’s a political event. Unfortunately, the ten guys in Europe who run this currency have all got Ph.D.s in economics.”
Napier then told us about his experience working in Hong Kong in 1998. That year, the French senate sent a delegation to Honk Kong to investigate the Asian financial crisis, and consult Napier about the evolving project that was the Euro.
The French delegation was convinced of the merits of establishing the Euro, because it would supposedly bring lasting peace along with economic integration. WWII was still a searing memory. The delegation asked whether the Euro would help “iron out the inefficiencies” across Europe. Napier replied, “The things you call ‘inefficiencies’ here in Hong Kong are the things in France you call ‘culture.’” He knew that currency integration without political integration wouldn’t work.
Napier fears that the political will to save the Euro is forcing “economic deflation” in Greece and the other spendthrift countries within the Eurozone. Those running the ECB may rightly note that wages in Greece might decline to achieve a healthier Eurozone equilibrium. But Napier believes that if too much harsh austerity is imposed on the Greek economy, the democracy in Greece might be destroyed in the process. Napier points out that democracies very rarely deflate. They instead devalue their currencies and push new money supply through the channels of commerce.
Napier is concerned that “the ECB will not change its mind on hard money until it destroys one of the democracies in Europe.” Then came the most shocking thing Napier said in his hour-long speech: a prominent Greek businessman confidently assured him that the United Nations will be running Greece by September. If so, this should keep fear in financial markets at healthy levels through this spring and summer. Greece is not resolved, yet the markets appear to believe so.
When asked for a forecast of the best potential asset class over the next decade, Napier’s replied: “A basket of Asian currencies.”
The part about China appreciating their currency is especially interesting I find. Politicians will always be behind the eight ball because they feel they need to make things fair and by doing so they simply push things to the opposite extreme. Hmm, maybe the other problem is that the idea of “fair” is: “I get what I want”. Yup, that sounds fair to me… but only as long as I get what I want too. See the problem here? Market forces naturally correct human error, but when we try to interrupt that cycle the resulting extremes become all the more severe.
It will be no different with proposed legislation or pressure to change regulations in the stock and currency markets. Nothing will change…no regulation change was worked to avert “disaster” in the past, why would it all of a sudden change? The people who are making money are making money because they find ways to take advantage of opportunity, and they will continue to do so no matter what new political idea is introduced.
The technical outlook for the EUR/USD will be posted shortly.
Cheers,
Cory Mitchell, CMT
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Market(s) Analysis | admin | April 17, 2010 | 
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