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Wednesday August 12, 2009 - 12:26:58 GMT
Black Swan Capital - www.blackswantrading.com

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Ut oh!

Key News
•    The Bank of England said that the British economy will take time to recover from the financial crisis and that the country's banking sector remains "fragile." (AP)
•    The International Energy Agency raised its global oil demand forecasts for this year and next, citing accelerating industrial activity in China, the world’s fastest-growing consumer of crude. (Bloomberg)
•    Australian consumer confidence jumped this month to the highest level in almost two years. (Bloomberg)
•    Estonia’s gross domestic product shrank 16.6 percent in the three months ended June from the year-earlier period, the most since at least 15 years when records started, after shrinking 15.1 percent in the first quarter, the Tallinn-based statistics office said today. (Bloomberg)
•    South African retail sales fell for a fifth consecutive month in June, dropping 6.7 percent from a year ago, as mounting job losses led consumers to cut back on spending. (Bloomberg)
•    The ruble weakened to the lowest level in more than five months versus the euro, prompting speculation the central bank may be forced to intervene.


Quotable

“It was a bright cold day in April, and the clocks were striking thirteen.”

                        George Orwell

FX Trading – Ut oh!

Interesting!  The global economic news this morning sure doesn’t seem to bode well for “the recession is over” crowd.  Disinflation, or deflation by another word, continues apace almost everywhere; that’s not exactly the type of thing one would expect if stimulus has provided some traction.  Emerging/developing countries almost everywhere are being squeezed very hard still.  In fact, a couple in Europe are on the brink of currency devaluation, and we know these things one started have a contagion quality that is hard to stop.  And of course the Russian economy continues to crater badly.  

And despite Australia’s excellent consumer confidence showing, its currency fell against the dollar this morning.  We suspect said fall has more to do with China than Australia vs. US.  

Would it be fair to say that all recovery boats are latched to the Chinese juggernaut—the drive of global optimism despite some ugly numbers still showing up most places?  We will go out on a limb and say yes—that’s exactly the case.  

This morning, the Chinese Shanghai index fell 4.6%.  Yesterday China racket-up another very negative export month for July at -23%; it was worse than June at -21%; not exactly the stuff of global demand.

 If this tree falls in the forest we think everyone will hear it and feel it…

 [Chart not available in text format]

I noticed the other day famous investor Jimmy Rogers, lover of all things China, except for the actual living conditions given he stopped in Singapore, said he wouldn’t sell Chinese stocks because it was like owning stocks in the US when it was booming back in the 1800’s or something like that. To Mr. Rogers’ credit, he was very right and ahead of the crowd on the boom in Chinese stocks this year.  He is a very smart man.  But, we would make another comparison between the US and China at the moment, especially after reading reports yesterday that said President Obama didn’t believe Buy America legislative would impact Canadian trade. 

Our favorite comparison is that of China now to America in 1929.  China still refuses to give up on exports and has subsidized its export sector to push that stuff out as fast as possible i.e. the goal is to force some of the brunt of the domestic pain onto its trading partners (and knowing a transition to more domestic demand will not be easy).  This is precisely what the US did in 1929 to its trading partners as the major export/manufacturing power then. 

US trading partners didn’t like it when the US back in 1929 decided to subsidize production instead of do all it could to ramp up domestic consumption; and China’s trading partners don’t like what China is doing now—the same thing.  And when you consider the magnitude of the decline in global trade now, relative to 1929, you begin to realize just how much pain the export driven economies are taking—at least those that have not had the wherewithal to force feed the equivalent of almost half their total GDP into the economy, as China has. 

The chart below was sent to us by a friend.  The maroon line on the chart is the US export decline from Oct. 1929 thru June 1930.

[Chart not available in text format.]

 Notice that the relative export declines in Japan (blue) and China (green) are worse in this cycle than the US in ‘29.  Germany is represented by the black line, and the US today is the red line.  But what is so interesting, and here is the rub, declines today in exports are primarily market-driven i.e. we do not yet have the specter of a trade war looming, as was the case in 1929-1930 and consummated with the signing of the Smooth-Hawley Tariff Act of 1930.

From Wikipedia [our emphasis]:


“Although rated capacity of the U.S. manufacturing sector had increased tremendously in the post-WWI period, actual output, income, and expenditure had not. Under the direction of Republican Senator Reed Smoot of Utah, the party had drafted the Fordney-McCumber tariff act in 1922 which increased tariffs with the purpose of increasing domestic firms' market share [China’s primary goal now]. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another tariff increase (Smoot-Hawley Tariff Bill) [weakened labor markets all across the industrialized world now]. 

So, if China continues to push out extremely low priced subsidized final goods—already hurting its Asian-block competitors badly—Western nations will likely respond with tariffs in this economic and political environment.  Already Europe has accused China of dumping steel pipe onto the market and has levied 24% anti-dumping duties.  India isn’t exactly happy with some of the goods crossing its borders of late.  And the big swing from capital to labor environment in the US suggests we will likely see more of the Buy America theme catch hold. 

None of this may come to pass if there is a rebound in global demand.  But if there isn’t, we think stocks in bubble-licious China, and everywhere else, are way ahead of themselves.  And if that’s true, watch out for yet another major US dollar risk bid higher that will once again make it clear this game is about global capital flow and nothing else.


Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

 

 

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