- Cigarettes are the vice America needs
- Well that’s one reason to buy yen…
- Musicians, don't just blame the labels for your lack of dough
- Giving stock away to staff doesn't absolve share buybacks
- A penny for Macpherson’s thoughts on the nominal anchor
- Monopoly and its discontents
- A State of Mind
- This is nuts, when does Netflix crash?
- No Bloomberg, the world's richest people did not lose $114bn...
- Someone is wrong on the internet, government employee pensions and passive investing edition
- Someone is wrong on the internet, possibly fragile
- Someone is wrong on the internet, consumer financial regulation edition
- Someone is wrong on the internet: tontine tokens [Update]
- Someone is wrong on the internet, road economics edition
- Someone is wrong on the internet, wages and the stock market edition
“Bound tariff” tomfoolery is below average.
A guest post by Peter Doyle, economist and former IMF staffer _______ I very much hope—and expect—that Brexit will be rejected. But the 200-odd pages of HMT density on trade theory are intended to intimidate, not illuminate. They distract from the key issue; the impact of Brexit on the Euro.
Earlier this month at the annual meetings of the American Economic Association in San Francisco, Justin Yifu Lin argued that China’s growth slowdown has been mainly the result of external and cyclical factors rather than structural transformation. His case rests on the idea that other East Asian and emerging-market economies had also decelerated in recent years, some of which — Hong Kong, Singapore, Taiwan — do not have the same structural problems that are thought to plague China’s economy. Furthermore, Brazil’s decline has been much sharper than China’s, while India in 2012 also slowed dramatically before rebounding; China can rebound too.
At FT Alphaville we’ve flagged concerns about the perfect storm of declining petrodollar/sweatdollar recycling flows, a Fed tightening schedule, and a regulatory environment increasingly averse to cross-border repos and funding, with potential unintended (or perhaps intended but grossly under appreciated) effects for offshore dollar liquidity. Why dollar liquidity, not euro, sterling or yen? Well, obviously, because the dollar remains the premier global reserve asset.
To understand what happened in China this week we think the best financial analogy for China’s management of its economy and its external capital account is this: think of it as a giant money market fund. So when the currency was officially devalued three times, it was equivalent to the Great China Money Market (GCMM) fund “breaking the buck”, a rare event when presumed safe investments turn out to not be so safe as thought. We’re going to explain what that means in two posts, the first of which is the extended history of China’s economic management needed to realise how the world got to this point in the first place.
You can sign up to receive the email here. Oil topped $68 a barrel after falling to a five-year low near $45 in January. Saudi Arabia raised its selling prices in response to stronger demand and traders are looking beyond the currently well-supplied market to growing consumption and a slowdown in US oil output. (FT) Saudi Arabia has shown little inclination to curb its production, which has risen above 10m barrels a day, as it moves to expand its market share. It also said that it remained committed to infrastructure and development projects but admitted it would need to “rationalise” spending in light of low oil prices. (FT) The rebound in prices boosted inflation expectations and set prices tumbling across major government bond markets, pushing yields to levels not seen since the ECB began QE earlier this year. (FT)
Canada is a large, diversified economy in which commodity extraction plays a (relatively) small role. Yet historically its currency, which was once known as the Canadian peso thanks to its 30 per cent devaluation against the US dollar in the 1990s, seems to have been driven by changes in the oil price. Here’s a chart comparing two-month changes in the amount of US dollars you can buy with a single Canadian dollar against changes in the price of West Texas Intermediate:
In our previous post, we looked at the ways that global corporations minimise their tax burdens by routing income through offshore tax havens and transfer pricing. The ultimate beneficiaries of these shenanigans, of course, are actual people rather than legal entities. Many of these people also take advantage of offshore tax havens to avoid reporting capital income to local authorities. In this second post, we will look at how Gabriel Zucman tracks this hidden wealth and his suggestions for governments to capture missing revenue. According to Zucman, at least 8 per cent of global household financial assets — a figure that doesn’t include bullion, art, real estate, jewelry, and other physical stores of value — are held in tax havens, although he suspects that this is a lower bound. Switzerland alone is home to about $2.5 of non-resident holdings, while Luxembourg has about $370 billion attributable to foreign households and another $350 billion held by “family offices and other intermediaries.” (More on the exact methodology can be found here.)
The UK’s current account deficit is at its widest level in decades, and over the previous four posts we’ve managed to narrow down the cause to falling earnings from UK direct investments abroad since 2011. In our final post, we will do our best to figure out which specific investments are to blame, as well as what all of this means for people who actually live and work in the UK. Our main limitation is that the most detailed data end in 2012, although we can use that information to make some reasonable inferences about what has happened since then. About half of the decline in the UK’s earnings from foreign direct investment from 2011 to 2012 came from the “information and communication” sector, which includes publishing, media, software, data processing, and telecoms. Almost all of that decline can be attributed to the European Union. So what happened?
As a brief follow-up to yesterday’s post on the impact of US trade with China on US employment and incomes, we thought it would be useful to visualize a few interesting facts about the evolution of the bilateral trade balance over time. First, look at how the deficit in the trade of goods swamps the modest surplus in the trade of services. Whilst the data on services are annual and stop in 2012, the general picture would probably not look much different even if it were more up to date:
Given that modern-day warfare must at some point involve drones or autonomous vehicles, it makes sense that modern-day propaganda wars should involve Twitter and social media. The battle for cyber hearts and minds in that regard is now getting really interesting. One need only do a casual Twitter search for “пустые полки“, the Russian for empty shelves, to see what we mean. The backstory here is that in retaliation for US and EU sanctions, Russia has decided to ban the importation of large categories of food products from each.
Small Kurdistan-related storm on Wednesday (aside from the headline news of the Isis overthrow of Mosul)… @NatRothschild1 not happy with @FTAlphaville for saying Mosul lies between Genel assets Bina Bawi and Ber Bahr. — Rob Davies (@ByRobDavies) June 11, 2014
Markets: Trading in Asian equities was mixed, with growing jitters over developments in Ukraine depressing several markets and local data providing a filip to Japanese stocks. (FT’s Global Market Overview)
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC. But it’s hardly a revelation. We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages. Goldman even blessed us with a more recent update about the shenanigans in March:
And on the seventh day it fell again, in accordance with the PBoC… which cut the fixing rate. Pity the RMB carry trade, no matter what the reason. Deliberate carry trade rumbling, trade band widening to allow greater market control of the exchange rate… or maybe, just maybe, that China is kinda thinking that a depreciating yuan ain’t a terrible policy right now.
Markets: More signs of a slowdown in the world’s second-largest economy had a ripple effects across Asia-Pacific markets. A preliminary or “flash” reading of HSBC’s closely watched purchasing managers’ index indicated that activity in China’s manufacturing sector hit a seven-month low in February, with an index reading of 48.3 missing expectations that were already subdued. (FT’s Global Markets Overview)
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits: We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q. Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”.