Wednesday, October 31, 2007

US dollar now upside down vs Canadian dollar

Take a look at these two charts borrowed from Yahoo Finance:

This is noteworthy as Canada is one of the USA's largest trading partners and this exchange rate reversal is a first for the USD versus the Canadian dollar. The strength of the Canadian dollar has likely driven up US exports to Canada in the third quarter GDP number that was just reported.

I see the Fed's cuts as making sense primarily in terms of helping banks' cash margins by widening the spread on loans they have outstanding that aren't in default. Banks that might be on the edge of solvency could be pulled back from the brink of receivership depending on their size.

Even though the Fed Funds rate has been lowered, there's still the issue in the interbank market of counterparty risk. I don't recall if it was the Fed Funds rate or LIBOR but recently one day's intraday data showed a high of 15%. So there are still confidence issues.

I could see the Fed raising by a quarter point by the end of the year depending on what happens with GDP. I think Trichet of the EU still needs to raise given the data that Claus Vistesen points out over at Alpha Sources.

Monday, October 22, 2007

Recent market trends

My interpretation of these three indexes is that many investors shifted cash from credit markets to equities due to the crunch and now are recognizing that equities will suffer due to economic slowing in the US and the effects of tighter credit on net income for public companies. Also, even though foreign buyers may be reducing their purchases of Treasuries, domestic demand for same has increased due to the desire to shift cash to the least risky investment.

Tuesday, October 09, 2007

Housing collapse hits Portland, OR

The link to the Portland Oregonian describes how
"Today, the John Ross has seen so many canceled purchases that developers actually have fewer buyers -- 192 -- than they did two years ago.
The John Ross got caught in the first slowdown after a historic run-up in condo construction that has reshaped Portland's skyline. For the first time, Portland's condo pioneers are suffering through an inevitable downturn.
The city has a condo glut, and thousands more are rising out of the ground. In the past six years, developers built 4,042 downtown condos, more than twice the figure from the previous 30 years. Today, developers have nearly 2,114 condos under construction. '

So much for the "it's different here" view pushed by so many city boosters. The article elaborates that "Two towers already switched from condos to apartments. Other projects were shelved, and construction has stalled on smaller projects from Beaverton to Northeast Portland"...

Tuesday, October 02, 2007

Can China avoid becoming the next Japan?

Brad Setser recently tipped readers to commentary by from Stephen Jen of Morgan Stanley as follows:
"Many in China have concluded that the blame for Japan's economic malaise in the 1990s lay largely with the appreciation of the yen. Beijing has therefore allowed the yuan to rise by only 10% since July 2005. But Japan's real mistake was its loose monetary policy to offset the impact of the rising yen—which further inflated the bubble—and then its failure to ease policy once the bust had happened. By holding down the value of the yuan and allowing a consequent build-up of excess liquidity, China risks repeating the same error."

I think Jen has the right idea here and gets to the heart of the problem that both China and Japan are in: they are caught between the Scylla of export decreases and hence negative GDP growth and the Charybdis of domestic inflation fueled by the desire for positive growth. You'll recall that in the early 1980's the US was in a somewhat similar situation with galloping inflation and due to a unique pair of strong leaders in Ronald Reagan and Paul Volcker, the political will existed to take the harsh economic medicine necessary to control inflation. I believe that Americans bought into that because President Reagan projected a strong sense of optimism about America's future and that absorbing problems in the short term would lead to long-term prosperity. Which I think has been borne out by subsequent American history.

This relates to the China vs Japan policy problem in that "Japan's real mistake" was the unwillingness to reign in monetary policy because it benefited vested interests. Which has led Japan to the fix it is in now. China needs to do something different or it will repeat the same error. The main wild-card for China is that taking the necessary economic medicine could lead to serious social instability.

Setser's stand-in over at RGE in recent weeks, Michael Pettis, has a very worthwhile post commenting that "
It is hard to overestimate the importance to China's near-term and longer-term prospects of the 17th Plenum in two weeks. These meetings, held every five years, are the main events of China’s political cycles"...Pettis further comments that
"the months leading to the congress are rife with factional infighting, sweetheart deals, attacks on frontrunners, corruption scandals, and the all-important maneuvering for promotion. Unfortunately, on the assumption that that any serious contender must at all costs avoid doing anything that may give rise to criticism before the promotions are decided, the period before the meetings tends to be a time in which very little, no matter how urgent, gets done"...