Coggan: China Will Shape Next Bretton Woods Pact - This is an interesting column by Philip Coggan for Bloomberg. Here is the opening:
When the world economy heads into crisis, the international currency system often breaks down. This occurs either because debtors can't meet their obligations, or because creditors fear they are not being repaid in sound money. The first condition exists today in the euro zone; the second is likely to emerge in the China-U.S. relationship.
So how might these conditions change the system? Much discussion concerns whether the U.S. dollar will be replaced as the global reserve currency by the Chinese yuan or whether it will simply be one of a number of reserve currencies that includes the euro, yuan and yen.
The global reserve currency is the one that forms the largest proportion of the holdings of central banks. More broadly, it is also the currency most likely to be accepted by merchants worldwide. In my view, the debate about whether the dollar will be replaced by the yuan is a bit of a red herring because such a shift will not occur quickly.
As of 2010, about 60 percent of all foreign-exchange reserves were denominated in dollars, giving the U.S. currency a critical mass. Investors are still comfortable with holding it; despite the country's fiscal problems, in times of crisis, the dollar is regarded as a haven. It will take a long while for international investors to become confident that a Communist-led government will always respect their rights.
China's Enormous Economy
By 2020, if current trends are realized, China will become the world's largest economy. The nation's foreign-exchange reserves already give it significant power as a creditor nation. But even if foreigners wanted to hold yuan instead of dollars, there would be constraints on their doing so. And removing the constraints would probably cause the yuan to soar, something that the Chinese are keen to avoid.
So it seems unlikely that the next 10 years will see a yuan standard replacing a dollar standard. But might the present crisis conditions lead to some other sort of change? Might countries, for example, be driven to enter a new arrangement comparable to the 1944 Bretton Woods pact, in which the world's major industrial states agreed to adhere to a global gold standard to stabilize international currencies?
My view - This is interesting conjecture from Philip Coggan and while "crisis" has probably been the most frequently used descriptive word in economic reports since 2008, no one could seriously equate today's debt problem with the real crisis of WW2, which led to the Bretton Woods Agreement in 1944.
There is a fair degree of hyperbole in describing today's problems as "a global debt crisis" or "crisis of capitalism". Are the Asian-led growth economies in crisis? Obviously not. I would question whether the USA's consumer, state and central government debt burdens qualify as a genuine crisis, although they are certainly long-term problems. The Eurozone is in a crisis entirely of its own making but even this has probably passed its nadir now that the ECB is functioning as the lender of last resort.
I would also argue that there is no "crisis of capitalism", although capitalism is too often abused by the serious problem of low ethical standards.
I do not expect to see a new global currency system within the next decade. It would be almost impossible to agree upon and no government is seriously lobbying for a new Bretton Woods today. Instead, the world is still adjusting to the comparatively new and highly competitive world of globalisation. While sometimes controversial in the west, this has already proved to have far more advantages than disadvantages.
For evidence, just ask the hundreds of millions of people in the developing world who have emerged from poverty and into the middleclass during the last ten to twenty years. In the west, the results are mixed. Many people have seen their standards of living decline, at least temporarily, as the global playing field becomes more level. However the corporate Autonomies - successful multinational companies which have grown way beyond their home countries - have flourished as never before thanks to globalisation.
So if not a new Bretton Woods, what kind of a currency world are we likely to see over the next decade?
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Email of the day (1) - On 5-year weekly versus 1-year daily charts:
Thank you for the excellent service. Can you refresh the beginner traders why you prefer to use 5-year weekly charts with a 200 EMA versus a 1-year daily charts?
My comment - Thanks for the feedback and a question of general interest.
Our preference for weekly over daily charts can be explained in one word - perspective. However, it depends on what you are doing. For instance, if day trading, heaven forbid because there would be little time for anything else, I would be looking almost exclusively at intraday tick charts. These enable one to scrutinise the market as if it was under a microscope and will show the same trends, congestion area trading ranges and trend endings as you see on longer-term charts.
Moving up the time scale, as a short-term trader meaning holding positions for a few days to several weeks, I would focus mainly on daily charts showing a year's history but I would also want to be familiar with the weekly chart for perspective.
This item continues in the Subscriber's Area.
My personal portfolio: Investing more accumulated dividends in my long-term accounts - Details and charts are in the Subscriber's Area.
Email of the day (2) - On Iran's oil:
"my understanding as reported in DEBKA is that both india and china will continue to buy oil from iran but in order to not be seen paying for it they intend to pay with gold."
My comment - Well, even if true, which I doubt, India and China would not talk about it. Also, a transfer of gold, which would not make sense for either country, would be far more visible than a currency transaction. Oil is the most fungible commodity so the supply would show up somewhere, for anyone who wished to purchase it.
Email of the day (3) - On money flows:
"Many thanks as always for such a fantastic and interesting service. I was wondering whether you could expand on your extremely interesting comments re money flows - do you have access to any data that shows flow from cash to bonds to equities, by participant type? I would be extremely interested in seeing any data you may have on this.
"Many thanks for such a valuable analysis,"
My comment - Thanks for the enthusiastic feedback.
I do not have precise data on money flows from one category of investment to another, other than what may be highlighted in some of the external reports which we sometimes post. However, one does not need to be a stats wonk to see what is going on, and once hard data becomes available, it is almost certainly out of date and therefore of questionable value. I will repeat with what I said on Wednesday:
"The key to successful navigation in this environment is to identify and follow the money flows. This requires common sense, analytical curiosity, an understanding of crowd behaviour, and a willingness to observe price charts in the manner of a naturalist."
The most important clues, which anyone can profit from, are in the price charts. A persistent uptrend can only be demand driven, and a persistent downtrend can only be supply driven. When they eventually lose momentum, which they inevitably will, the game has changed for at least the short term. Learn how to read price charts factually - I think you would enjoy TCS which Eoin has taught since 2007, and you will be in a better position to monitor money flows than most other people in the markets.
Chart of the day - You won't want to miss this one - it is in the Subscriber's Area.
Quote of the week - On intelligence:
"Intelligence is quickness in seeing things as they are."
Additional commentary by Eoin Treacy
Elephant book – Thanks to a subscriber for this heavyweight 152-page report from Deutsche Bank expressing a cautious attitude to the South African market. The full report is posted in the Subscriber's Area but here is a section:
While the above represents our neutral position, we do make allowances for a discretionary adjustment to the equity risk premium implied. At present, we feel there remains a strong case to assume an exit multiple well below the historical average:
While we think recent adjustments to commodity price forecasts have better encapsulated the current macro environment, we continue to see risks biased to the downside for as long as GDP projections are being lowered. While acknowledging the tenuous relationship between SA GDP and the earnings growth reported by SA listed companies (large foreign-sourced earnings component and different composition), current expectations do not appear out of line but look vulnerable to any further cuts to GDP.
Our own commodity forecast profile anticipates that prices peak in 2013 and then begin to decline. For as long as investors believe Resource earnings are close to peak levels, the Resources sector will likely trade at a discount trailing multiple relative to history.
In what will likely prove a slower, more volatile growth environment for large OECD economies, with elevated forecast risk due to the reliance on policymakers, we believe equity investors will demand a higher equity risk premium than usual.
With a greater level of comfort around our earnings forecasts following recent downgrades and limited directional bias from commodities and exchange rates, we have reduced the amount by which we expand the equity risk premium from 50% in 4Q11 to 25%.This implies an exit PE multiple in two years' time of 11.1x. This aims to cater to downside risk to earnings forecasts in the interim, as well as the potential for a lower-than-average multiple for the reasons given above. Relative to our assumed neutral rating over time, our discount caters for earnings falling short of expectation by c.13% over the next two years.
My view – The South African market is generally associated with the commodities sector because of the significant weighting of industrial and precious metal miners. However, a point often overlooked is that a number of Autonomies are also listed in the country from sectors such as brewing, telecommunications and luxury goods. In addition, South Africa's large young population is migrating into the middle classes. This is reflected by the relative outperformance of the consumer retail and food sectors.
The FTSE/JSE All Share is one of only four indices to have successfully held a move to new highs since August. The banking sector has outperformed the wider market since October and continues to extend the breakout to new all-time highs in nominal terms. A sustained move below 40,000 would be required to question medium-term scope for continued upside.
The Rand has surged versus both the US Dollar and Euro over the last month. Sustained moves above ZAR8 and 10.75 respectively would be required to check medium-term scope for continued outperformance.
This section continues in the Subscriber's Area.
Greek Investment Book 2012 – Thanks to a subscriber for this topical and informative report from National Securities in Athens. Here is a section:
The significant underperformance of the Greek stock market during 2011 (-52%) reflected substantial uncertainty regarding the country's economic recovery path, the effectiveness of fiscal adjustments made during the year as well as mounting concerns about debt issues in various sovereigns across Europe.
A multifaceted economic crisis has unfolded in three main areas (a) sovereign debt issues -- debt sustainability and capacity as a country to produce positive economic returns through structural and fiscal reforms, (b) banking sector issues– sovereign debt exposure and deteriorating loan quality have seriously affected balance sheets, funding conditions and capital requirements and (c) under-investment issues– the necessary element that will put the economy back on the growth track and instil market confidence towards a sustainable recovery.
During these turbulent times, we maintain exposure in selected non banking names for the largest part of 2012 and expect to reevaluate our stock picks towards the end of the first half of the year or until balance sheet repair in the banking sector is reasonably secured. Post recap, opportunities may arise in financials as well. Earnings momentum in the banking sector remains particularly weak with considerable negative tail risk. Elsewhere in the economy, there are limited signs of growth re-acceleration, mainly supported by cost cutting. Still there are certain sectors/business models capable of withstanding recessionary pressures going forward.
My view – As long as negotiations with Greece's creditors remain unresolved there will continue to be speculation about the prospect of an unruly default. However, if we accept that default is a fait accompli then the only question is what the fallout is likely to be. The ECB is doing everything it can to erect a dampener for any negative repercussions by making huge amounts of liquidity available. In the event that this is not enough, the central bank can be expected to release even more. Everything will be done to mitigate the risk of contagion to other sovereigns and the wider financial sector.
This section continues in the Subscriber's Area.
Email of the day (1) – on importing the subscriber's Audio to iTunes:
“Could you please furnish directions as to how one might, as a subscriber, listen to the daily audio commentary via the iTunes podcast? I have had difficulty subscribing via the RSS feed and was wondering if there is a simpler way of adding the daily commentary to my podcasts. Many thanks.”
My comment – Thank you for this question which may be of interest to other subscribers. Here is a link to my reply to a similar question on September 22nd 2011 which I have repeated below:
Here is a link on how to subscribe to Fullermoney's daily podcast via iTunes . In short, simply drag and drop the RSS icon located in the upper right of the Subscriber's Audio page into the Podcasts section of iTunes .
To transfer the podcast to your iPhone follow these instructions:
1. Connect the iPhone to your computer and open iTunes .
2. Once the icon for your iPhone appears in iTunes under 'Devices' click on it. This will open up the Summary page.
3. At the top of the Summary page there are a number of options. Click on Podcasts.
4. Click on the tick box for Sync Podcasts.
5. Click on the Apply button in the bottom right of the page.
6. Then click on the Sync button in the bottom right of the page. This will back up your data and transfer the podcast to your iPhone.
7. You will now find the podcast in the iPod section of your iPhone.
8. To find your podcast in the iPod menu of your iPhone click on More…
9. A menu will appear with a list of options. Podcasts should be the last one. Touch it.
10. The Fullermoney.com icon should appear in this menu and you touch it to listen.
In future, all you will need to do is Sync you iPhone with your computer and it should automatically transfer the latest version of the podcast.
Email of the day (2) – on additions to the Chart Library:
“I would like the following stocks in the chart library please: (Disclosure: I or my family holds these stocks)
“Berkeley Mineral Resources (BMR) London
Cyan Holdings (CYAN) London
Powerhouse Energy (PHE) London
Wildhorse Energy (WHE) London
Top Level Domain Holdings (TLDH) London
AFC Energy (AFC) London
Cohort (CHRT) London
Oxford Catalysts (OCG) London
Oxford Advanced Surfaces (OXA) London
Ophir Energy (OPHR) London
Hollysys Automation (HOLI) US
Smart Holdings (SMHS) US
Xcite(XEL) in Canada
Rambler Metals and Mining (RAB) Canada”
My comment – Thank you for these suggestions, a number of which were already in the Chart Library. The remainder have now also been added.
Email of the day (3) – on another addition to the Chart Library:
“Would you add the following Singapore listed stock to the library: Broadway, symbol: BWAY”
My comment – Thank you for this suggestion which has been added to the Chart Library.
Speaking engagements in the USA - I have accepted an invitation to speak to the Los Angeles chapter of the MTA on April 11th. The venue has yet to be confirmed but will be in the Long Beach area. Non-members are welcome to attend. The topic will be "To Hoard or to Horde: risks and opportunities from participating with the crowd."
I have also accepted an invitation to speak to the San Diego chapter of the MTA in the first week of April. A date and time has yet to be fixed but it will take place in the Del Mar area.
I still have some space available on my itinerary. If you would like me to speak to your local chapter or organisation in California or New York please contact your respective chairperson and ask them to contact me.
The Chart Seminar 2012 - Following a sell-out tour to Singapore and Australia last year, The Chart Seminar will be held in San Francisco, New York and London this year. Please be aware that the early booking rate for non- subscribers at the US seminars expires on January 31st.
We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at [email protected]
The date and venues for my seminars so far in 2012 are:
San Francisco - April 16th &17th 2012 Nikko Hotel
New York - April 23rd & 24th 2012 at The Manhattan Club (above Rosie O'Grady's) at 800 7th Avenue
London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire
London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire
The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.