We might just strip out one more thing from Deutsche’s recent report on Bretton Woods 2.o, namely the bit about how the growth of Chinese “reserve holdings associated with export-led growth provided de facto protection for foreign private investors in emerging markets and thereby caused the gross flows” needed for China’s growth strategy.
The point being that private capital flows generate political risk — “haha, all your FDI are belong to us” — and, without some sort of collateral, flows from rich countries to poor countries will be held back. Think of China’s reserves as a $4tn hostage which stops China from throwing its weight around and stands in the way of a geopolitical breakdown. With it in place, foreign capital becomes more comfortable heading into China. The idea from Deutsche is that this was the only way to get China’s development model to work on the scale it has. Read more
In which Citi look for the next Apple, our emphasis:
Apple’s valuation has been through a spectacular round-trip over the past couple of years (Figure 2). Its total market cap first broke through $600bn in August 2012, but then collapsed to $341bn in April 2013. Since then, the recovery has been equally remarkable, moving back above $600bn in the past month. In the process, it has regained the title of the world’s most valuable company ($187bn ahead of Exxon at number 2). To put this in context, Apple has lost and then regained the value of the Russian stock market in just two years.
The narrative associated with this spectacular journey often focuses on the never- ending pressure for Apple management to maintain the company’s product pipeline. A lower share price reflected concerns that Steve Jobs’ midas touch had been lost. The subsequent rebound was associated with increasing conviction that it had not.
Markets: Japanese stocks posted their sharpest declines in three weeks after a barrage of data called into question the prospects for a summer economic recovery. Trading in other markets was subdued – Hong Kong’s Hang Seng and Sydney’s S&P/ASX 200 were both flat – with the worsening situation in Ukraine giving a boost to havens and causing a small retreat from riskier assets. The S&P 500 fell 0.2 per cent from a record high in New York and the CBOE Vix index was up 3.3 per cent late in US trade. (FT’s Global Markets Overview) Read more
This retrospective on predictions made in the 2003 Essay on the Revived Bretton Woods System by Deutsche’s Dooley, Folkerts-Landau, and Garber is brought to you by Deutsche’s Dooley, Folkerts-Landau, and Garber.
Their premise was and is that we are part of an international system characterised by newly industrialised countries pegging their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth furnished by an excess supply of labour. Those developing countries then ship their gains back to the US et al as a form of collateral against new lending as the net foreign assets of poor countries support the risks taken by their richer brethren.
More so, they suggested that we were in the China phase of this system, that it would last for 10 years-ish… Read more
Elsewhere on Thursday,
- A resource curse in the Appalachians.
- “Switzerland, Country of Joyce”
- In which Frances Coppola wants to buy breakfast with gilts.
- Empathy, Paul Bloom is against it. Read more
Markets: Asian equities drifted lower in light trading a day ahead of market-sensitive GDP figures for the US and inflation data from Japan. (FT’s Global Markets Overview) Read more
From BofAML’s David Woo, with our emphasis:
A major consensus this year was that this was going to be a rates-centric year. Eight months into the year, many investors continue to believe that with QE3 winding down, all markets will be taking their cues from the US rates market sooner than later. Currency investors are no exceptions. USD bulls have built their investment thesis on the assumption of higher US rates and have been waiting for rates to climb to establish or add to long USD positions.
Price action over the past three weeks has been challenging this consensus of the preponderance of US rates. So far in August, the USD is up against the EUR, the JPY and the CAD, the first month in over a year that the greenback is staging a broad rally against major developed currencies. What makes this even more unusual is the fact that US rates have been declining this month. The combination of a strengthening USD and falling US rates is so rare that since the Lehman collapse it has only happened during three other months (Table 1). Is this just a coincidence or is the market trying to tell us that a new regime is upon us?
Elsewhere on Wednesday,
- Property rights and saving the rhino.
- Why the Putin era may be over sooner than we think.
- The philosophy of Bayesian probability or why you can’t chop decision theory up into two parts.
- US economy: the persistent myth of deleveraging. Read more
Of course, everyone’s a winner when judgements start off with prose like this:
Coal is king and paramount Lord of industry is an old saying in the industrial world. Industrial greatness has been built up on coal by many countries. In India, coal is the most important indigenous energy resource and remains the dominant fuel for power generation and many industrial applications.
Have a China rebalancing update in the face of a property downturn, the corruption crackdown and a reversion to type by Chinese leaders as they seek to prop up the economy.
To restate the obvious, China needs to rebalance its economy towards consumption over the next while if it’s to shift the economy away from a reliance on debt-driven investment and all of the “this is nuts” type excess that it can bring about.
And as UBS’s Wang Tao says: Read more
Elsewhere on Tuesday,
- Surviving the absence of trophy kids.
- Austerity, France and memories.
- In which the “Gandhi of grain” meets seeds of doubt. Read more
Some further, further reading on Friday — a new paper from Citi’s Willem Buiter, on why helicopter drops of money always work. From the abstract (our emphasis):
Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.
Elsewhere on Friday,
- Mugabe’s bailout.
- FX, where the summertime torpor disguises existential angst.
- Ferguson and the modern debtor’s prison.
- Hawks crying wolf.
- The shift from gold to fiat money as a black swan. Read more
Markets: Asia-Pacific markets are in a broad-based rally led by Taiwan, after US equities touched a record high and buoyed sentiment. The MSCI Asia Pacific Index, a regional barometer, rose 0.3 per cent in early Friday trading – its first rise in three sessions – led by a 1 per cent climb in Taiwanese stocks spurred by data which showed Taiwan’s unemployment rate had fallen to a six-year low of 3.95 per cent and highlighted the economy’s resilience in spite of a slowdown in mainland China. (FT’s Global Markets Overview) Read more
Elsewhere on Thursday,
- Saving Horatio Alger.
- And Fukuyama on the sources of US political dysfunction.
- Buffett: “If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing.”
- The high cost of defeating Isis. Read more
Markets: Chinese stocks slipped after further evidence suggested the mainland economy is falling victim to the summer doldrums, while a third solid performance by Wall Street buoyed sentiment and lifted stocks in Japan and Australia. The Flash China Manufacturing Purchasing Managers’ Index, which is weighted towards smaller manufacturers, came in at a three-month low of 50.3 for August, down from 51.7 in July. (FT’s Global Markets Overview) Read more
And by redemption gates we mean rules that give a financial intermediary the right to impose redemption restrictions (keep your money) when things get tense and liquidity is scarce. Rules like the SEC approved in July allowing money market funds sold to both retail and institutional investors “to impose temporary suspensions on redemptions, or gates, if a fund’s level of weekly liquid assets fell below 30 per cent of its total assets. The fund could also impose a liquidity fee of up to 2 per cent on all redemptions in those circumstances.”
We’ve asked before if imposing such gates might precipitate the problems they are meant to alleviate — if they might cause runs which otherwise would have been avoided — and at least one SEC commissioner, Kara Stein, thought so when voting against the new MMF rules above:
“As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital… “More importantly, a run in one fund could incite a system-wide run.”
Now, here’s the New York Fed’s Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi arguing just that Read more
Elsewhere on Wednesday,
- Darwinism, Fortune 500 edition.
- A glimpse into the id of US national inequality. Weird.
- Can a robot be too nice?
- Call it the no-raises recovery… Read more
Markets: Asian markets were muted after another solid session on Wall Street and Japan’s trade deficit unexpectedly swelled. Market sentiment had been upbeat initially after a New York session in which the S&P 500 climbed 0.5 per cent to 1,981, leaving the US equity benchmark less than 0.4 per cent shy of the record closing high it struck three weeks ago. The US dollar rose 0.4 per cent to a fresh 11-month high against a weighted basket of currencies as housing starts jumped 15.7 per cent last month to their highest level since November. (FT’s Global Markets Overview) Read more
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever.
The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric.
Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers.
That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs. Read more
Elsewhere on Tuesday,
- “The Oakley Country Club would seem to be the biggest hotbed of alleged insider trading since SAC Capital.”
- Chinese myths of social cohesion.
- Regulating infinity.
- Secular stagnation, meet data. Read more
Markets: A rally on Wall Street lit a spark for equities across Asia, and strong earnings in Australia and deal chatter in Japan fanned the flames. In New York the tech-heavy Nasdaq Composite rose 1 per cent to a 14-year high and the S&P 500 added 0.9 per cent. (FT’s Global Markets Overview) Read more
Elsewhere on Monday,
- Under what circumstances should you worry that the stock market is “too high”?
- Serried Yuppiedromes.
- Don’t bank on Europe’s banks.
- Nationalise the clearinghouses? Read more
Markets: Asian markets were mixed following a broad rebound last week, with some housing-related stocks under pressure after an index of mainland property prices fell for a third straight month. (FT’s Global Markets Overview) Read more
If you buy this…
… keep reading. Read more
Elsewhere on Friday,
- Let’s Gowex: How a Spanish tech star fooled the world.
- The ECB is not doing its job. Again.
- What should the ECB actually do, the Tyler Cowen solution…
… with a Sumner critique. Read more
Markets: Asia-Pacific equities were on track to finish the week with their biggest weekly jump since March. The laggard was Japan, where the Nikkei 225 average lost 0.1 per cent, although other markets are buoyant. For the week so far, the MSCI Asia Pacific Index has gained 2.6 per cent, rebounding from last week’s 2.4 per cent tumble. Barclays analysts said that this week’s gains in emerging markets were a relief rally “without a catalyst”. (FT’s Global Markets Overview) Read more
Elsewhere on Thursday,
- Inequality and the common pool problem.
- Through the seasons in a village in India’s Melghat.
- The economics of pricelessness.
- Smithers on the Scottish question. Read more
Markets: Asia-Pacific markets advanced following the release of strong earnings from Australian companies, and the first rate cut in 15 months from the Bank of Korea. (FT’s Global Markets Overview) Read more