Asset prices have started to climb again, but their rise stems from a bear-market bounce, opening the door for a second global dip in 2010.
The last structural bear market happened in the 1970s and lasted for ten years. It is obviously difficult for investors to stay on the sideline for a decade. After all, how long does one live? This is why a structural bear market swallows more and more people through such rallies. The ones that jump in later tend to be more patient and probably smarter. I am afraid that the current bear market won’t end until it brings down Warren Buffett.
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Double Dipping in 2010
Asset prices have started to climb again, but their rise stems from a bear-market bounce, opening the door for a second global dip in 2010.
Andy Xie
13 April 2009
At the beginning of 2009, I wrote that the global economy would stabilize in the second half, and a bear market rally could start in the second quarter of 2009. I thought that stagflation would be the dominant trend for the next few years. I am still sticking to my story. The bear market rally began earlier than I expected. The reason was that major governments have been introducing subsidies for speculation. They believe that the main problems are liquidity and confidence. Hence, if investors or speculators are brought back in the game, the world economy could return to a virtuous cycle again. I think that this type of approach could lead to a second dip in 2010.
Subsidizing risk taking does inflate asset prices – mainly stocks for now. However, the hope that rising stock prices will lead to economic revival will not be fulfilled. We are in the middle of a debt bubble bursting. Rising asset prices lift the economy through boosting borrowing for investment and consumption. As the current levels of indebtedness are already too high, we won’t see rising debt demand for consumption or investment. When the dream of a quick economic recovery is dashed, stock prices will slump again, which could expose more problems in the financial system and trigger a second dip in the global economy.
The boom-burst cycle has occurred frequently in history (see Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleburger). But a synchronized global one is rare. The last crisis comparable to the current one was the boom-burst of 1920s and 30s. A synchronized global cycle requires trade and cross-border capital flow to be large. A synchronized global burst is difficult to overcome, because devaluation and export promotion no longer work. East Asia came back this way from its banking crisis 10 years ago, but it won’t work this time around.
Policymakers are frustrated that their stimuli are not working so far. The U.S. government and the Federal Reserve have spent or committed US$12 trillion to bail out the American financial system. The United States’ budgeted fiscal deficit for 2009 is US$1.75 trillion, 12 percent of its GDP, but will probably surpass US$2 trillion. ECB, the Bank of England, and the Bank of Japan have all cut interest rates to historical lows. Their governments are already running high fiscal deficits, but employment, business confidence, and consumer confidence continue to deteriorate around the world. It’s likely that major economies suffered contractions in the first quarter of 2009 similar to the ones they experienced in the last quarter of 2008. For the whole year of 2009, the euro zone, the UK, and the U.S. may contract by 4 to 5 percent. Germany and Japan could contract by 7 to 8 percent.
This sort of global economic collapse is unprecedented. Moreover, it is difficult to see how the world will grow again when the collapse is over. Out of desperation, governments are trying to support asset prices either directly or incentivizing reluctant speculators to play. Without understanding what governments are doing, most people think that things are either getting better or will soon. After all, shouldn’t stock prices tell us about the future? This positive thinking is leading many to chase the market. This is a bear rally that will swallow many smart investors.
This phase of government-targeted asset prices began with the Fed announcing it would buy up to US$1.15 trillion of Treasuries, and commercial and mortgage papers. Its goal is to stabilize property prices. However, this sort of policy necessitates the Fed know what property prices should be. U.S. property prices were 100 percent overvalued relative to income. After the bubble burst, they should go down. What the Fed is doing is to shift a big chunk of the adjustment through general inflation rather than property price decline. This will impact the dollar for years to come.
The second part came with Timothy Geithner’s plan for stripping toxic assets from troubled banks. Hank Paulson, Geithner’s predecessor, wanted to focus on stripping the bad assets off the banks too. His plan didn’t fly because the market prices for the bad assets were too low for the banks to survive. Most banks have questionable assets worth more than twice their equity capital. As these assets are trading at 30 cents on the dollar, if the toxic assets are sold at market price, the banks will be bankrupt. This is why Hank Paulson shifted to injecting money directly into the banks first. The hope was that it would stabilize the financial system, and toxic asset prices would rise sufficiently for the banks to survive. This hasn’t happened.
The Geithner Plan tries to boost the prices of toxic assets by subsidizing speculation. The centerpiece of the plan was offering government-guaranteed six-to-one leverage. The current toxic asset price, 30 cents on the dollar, reflects the expected return on the bad asset. It is equivalent to a 70 percent chance of bankruptcy and a total wash for creditors, and a 30 percent chance of survival for the borrowers that support the assets. Under the Geithner Plan, an investor that puts down one dollar can buy seven dollars worth of toxic assets, meaning he could buy US$23.3 of toxic assets. There is a 30 percent chance that the investor gets US$23.3, which would give him or her an income of US$16.3, after paying off US$6 of debt. There is a 70 percent chance that he or she loses everything. Hence, the expected income for the US$1 investment is US$16.3 times 0.3, or US$ 4.9.
This plan should have boosted demand for toxic assets tremendously. Indeed, based on the simple example above, investors should be willing to pay more than twice the current price. This would save the banks. Investors would reap rewards from the 30 percent of performing asset they bought and leave the 70 percent of non-performing ones to the taxpayers, meaning that this “beautiful plan” works by robbing taxpayers. But the prices for toxic assets have not risen that much. Why? The market doesn’t think that the plan can work. Public opinion may torpedo it before it goes into action, and if it goes ahead, Congress may pass retroactive laws to confiscate the profits from the investors who participate in this scheme. Essentially, the Geithner Plan is giving speculators free money, but they are not taking it because they are terrified of the consequences.
The third piece is changing the mark-to-market rule. The U.S. Financial Accounting Standards Board has changed its rule for accounting asset value. It now allows financial institutions to value their assets according to their judgment rather than market price if they think that the market isn’t working. The market may not value asset prices perfectly, but who could do better? This rule change is to allow the banks in trouble to stop reporting losses from asset quality deterioration.
After this revision, the share prices of troubled banks rose sharply. The market was not just reacting to a superficial change. If banks can name their price for the assets on their books, they don’t have to raise capital to stay in business. This means that they might make enough money over time to recapitalize. Hence, bankruptcy risk lessens. The increased survival chance has boosted their share prices.
Isn’t it good that banks aren’t going bust? Not necessarily. Look at what happened in Japan. Its banks essentially didn’t report their losses and tried to make money to recapitalize. It kept the economy down for ten years without alleviating the capital shortfall. Changing the accounting rules doesn’t alter reality. These banks know they don’t have enough capital. Hence, they won’t increase lending and will try to milk their existing assets for profits to recapitalize. They will be a drag on the economy for years to come. The U.S. seems to be copying Japan.
In addition to U.S. policies for targeting asset prices, most other major economies are encouraging their banks to lend. What does “encouraging” mean? Banks normally lend to maximize profits by balancing risk and reward. When governments encourage them to lend, it really means pressuring banks to lower standards, i.e., taking on more risk for the same or less reward. In effect, these policies trade future non-performing loans for boosted demand today. The argument in favour such an approach is that, if every bank lends, the economy improves, which decreases non-performing assets. This sort of free lunch thinking works temporarily by inflating another bubble. Of course, it will create a bigger mess in future.
I think leakage will start to overwhelm these attempts to re-inflate the bubble. Another major dip in asset prices is likely. Further, I think that inflation will become a problem, which could cause Treasuries and other government bonds to lose value. Government bonds are the last bubble to burst. Other asset prices will bottom when this bubble deflates. This force could reverse all the air that governments are putting in now.
I have argued above for a second dip in 2010 and stagflation beyond. I want to add some comments on the nature of bear market rallies. In a structural bear market that lasts for years, stock markets can have big bounces from time to time. These bounces can be as big as 40 percent from bottom to top. Obviously, rallies of such size are mouth-watering. It is difficult for investors to stay on the sideline. I am not against playing such bear rallies, but one must remember that bear rallies are at best zero-sum games and often negative-sum games. One’s profit is someone else’s loss. Timing is everything in playing bear bounces. Getting in and out early are the basic principles. The most harmful behaviour is chasing.
The last structural bear market happened in the 1970s and lasted for ten years. It is obviously difficult for investors to stay on the sideline for a decade. After all, how long does one live? This is why a structural bear market swallows more and more people through such rallies. The ones that jump in later tend to be more patient and probably smarter. I am afraid that the current bear market won’t end until it brings down Warren Buffett.
SUCKER RALLY!
David Chapman
APRIL 9, 2009
Sucker rallies (or bull traps) in a bear market are a time-honoured tradition. Bear markets see many rebounds, ranging from feeble rises of maybe 10 per cent over a period of a couple of weeks to ones that last years and recoup anywhere from 50 per cent to even over 100 per cent from the low. Call it from the little sucker to the really big sucker. Little suckers bring a wave of short-term euphoria that "This is the end of the bear," while really big suckers make everyone forget about the previous drop, and then just when they believe it won't happen again, they are slammed in the teeth. The former are wonderful for nimble traders; the latter are wonderful for those who possess a healthy skepticism and realize that this is a nice party but it will eventually end badly.
During the really big sucker of 2003-07 there were those who warned about the dangers (bubbles in housing, bubbles in private equity and hedge funds, bubbles in derivatives). It is no surprise that those doing the warning were often referred to as pariahs, nutcases, perma-bears and worse, while mainstream media and the portfolio managers who were the backbone of the bull market kept on cheering the rise in the market. The perma-bears have resisted the temptation to say "I told you so". Today, after the biggest stock market collapse since the Great Depression, many portfolio managers rationalize the collapse, remain upbeat (even when they are down 40-50 per cent) and say that stocks are at great valuations now, and that you have to think long-term.
Sucker rallies in a long-term bear market are the opposite of mini-bears in a long-term bull market. Two excellent examples of mini-bears in a long-term bull were the stock market crash of 1987 and the 1998 Asian/Russian/LTCM collapse. Over the past hundred years we have had three long-term bear markets: The Great Depression and War 1929-49, the inflationary 1970s (1966-82), and the current one (2000 to date). No word yet on when the current bear will end his rampage.
But sucker rallies can be fun. Just realize that they are sucker rallies, and not the end of the bear market.
What are the reasons for sucker rallies?
• Bearish sentiment is usually very high and even at extremes.
• The high volatility VIX indicator at a major low is usually at extremes.
• Economic numbers are showing signs of improvement, leading the pundits to declare that the worst is over.
• Stock valuations are low. Value managers in particular tout the huge under-valuations seen in the market. Trouble is, stocks can become even more undervalued.
• When a rally does get under way, many jump in from fear they will miss the move, thus fueling a further rally.
Why do sucker rallies come to an end?
• Overconfidence creeps back into the market even as economic numbers may be beginning to slide.
• Bullish sentiment rises.
• The longer the rally goes on, the more are sucked back into the market as the smart money is selling. Sucker rallies are usually on low volume.
• Rally ends suddenly as reality sets back in.
What kind of sucker rallies do we get?
• Failed suckers - these are usually short-lived lasting a week to a most a week or two lifting the market less than 10 per cent from any low.
• Mini-suckers - usually rallies of 10 to maybe 20 per cent from any low, lasting a few weeks to a month or so at best.
• Big suckers - usually more than 20 per cent and could even rise as much as 50 per cent from any low. Big suckers can last a number of weeks but usually no more than a couple of months or so.
• Really big suckers - can last for months and even years and gain 50 to 100+ per cent from the lows. It is usually during really big suckers that the pundits declare that the bear is dead and that we have entered a new great bull market that will go on for many years.
We are going to take a look at the three big bear markets of the past century. Of course this one isn't over yet, and if the previous two are any guide it won't be over until somewhere between 2016 to 2020. It is the sucker rallies, though, that give investors an opportunity to make back some lost money and to restructure their portfolios for the next stage of the bear market. Just remember that sucker rallies often end suddenly and violently. So when the uptrend line goes - get out. Once a rally gets underway one can usually determine a major up trend line as opposed to short term up trend lines.
Over the past century, the bear market of the Great Depression and World War II was the mother of all bears. The worst decline was the 89 per cent collapse from 1929 to 1932, and in 1949 the market was still down 57 per cent in real terms from the 1929 highs. It took until 1954 to take out the highs of 1929.
Over the years there were many failed suckers. Our chart above can't really show them. There were a few mini-suckers, especially in the last years, from 1946 to 1949. There were nine big suckers that rallied anywhere from 26 to 63 per cent off the lows - good, tradeable rallies. The two most prominent big suckers were from November 1929 to April 1930 (52 per cent off the lows) and from April to November 1938 (63 per cent). We also shouldn't ignore the 100 per cent rally that started off the July 1932 lows. It was impressive but pretty short-lived, ending two months later in September. While these rallies were strong and over 50 per cent we still called them big suckers because the time frame was so short.
The best ones, though, were the two really big suckers. The first started at the secondary low in March 1933 and, with some interruptions, eventually gained 293 per cent from the lows, topping in March 1937 - a period of four years. The first phase gained 129 per cent before a six-month correction set in. Still, even at the final highs in March 1937 it was down 50 per cent from the 1929 highs.
The second really big sucker started in April 1942 and went through until June 1946. It was not as impressive as the first but it still gained 130 per cent off the 1942 lows and also lasted four years. Many considered the 1942 lows as the final lows of the Great Depression.
After the June 1946 top there was a mini-panic and three years of chopping around with a number of failed suckers until the final low in June 1949. While it took until 1954 to overcome the 1929 highs, the sense that we were putting the long nightmare of the Great Depression and War behind us really didn't happen until after the 1962 mini-bear. Four years later the market topped for the next 16 years.
For the period 1929 to 1949 there were: two mini-suckers (average gain 15.5 per cent); nine big suckers (average gain 44 per cent); and two really big suckers (average gain 211 per cent).
THE 1966-1982 BEAR
The bear market of 1966 to 1982 was very different from the 1929-49 bear market. Whereas the 1929-49 bear could be characterized as a massive collapse followed by years of trying to regain a foothold, the 1966-82 bear was a series of sharp ups and down over 16 years. The major collapse was the 46.6 per cent collapse from January 1973 to December 1974. That was also the lowest point of the 1966-82 bear.
There were fewer sucker rallies than in the previous period. There were numerous failed suckers and quite a number of mini-suckers. We didn't label failed suckers (under 10 per cent). We noted five mini-suckers, two big suckers and two really big suckers, although neither went on for any great period of time.
Mini-suckers were seen in the 1968 to 1970 market (one), the 1973-74 bear (two), and the period between the 1978 and 1980 lows where there was really just a series of ups and downs. The two big suckers were the rally from the 1966 lows following the collapse from the 1966 top. This big sucker rally was actually made up of two phases of big suckers, the first gaining 29 per cent and, following another sharp pullback, the second phase gained 21 per cent for a total gain from the 1966 lows of 35 per cent.
The second big sucker was seen at the end of the 1966-82 bear when a sharp rally got underway out of the 1980 lows that added on 41 per cent in just over a year. A year later, in August 1982, the market made its final low.
The two really big suckers occurred in the middle of the bear. The rally out of the 1970 lows was impressive, gaining 70 per cent overall in 32 months. There were two stages, from May 1970 to April 1971 (52 per cent) and from November 1971 to January 1973 (35 per cent). The second stage became known as the Nifty Fifty rally because so few other stocks participated in it. A classic sucker rally. What followed was the devastating 1973-74 bear.
The second really big sucker was from December 1974 to May 1976 - a period of 17 months, and an 80 per cent gain off the 1974 lows. Short for a really big sucker, but the gain was impressive. Naturally it was quickly followed by another significant collapse into 1978.
The 1970s was a period of rampant inflation. While the Dow Jones Industrials lost only 24 per cent to the lows of 1982 from the highs of 1966, in inflation-adjusted terms it was far worse. For the entire period, those who pursued commodities, particular energy stocks and gold and precious metals stocks, were able to make major gains. Oil prices were rocked by the Arab embargoes and finished the period with the Iranian hostage crisis that sent them soaring to $40 (over $100 in today's terms). Richard Nixon took the world off the gold standard in August 1971, when gold was $35 an ounce. Following the collapse of the Bretton Woods agreement and the onset of floating currencies, gold soared to $850 by January 1980.
In 1984 the stock market finally firmly passed the 1,000 mark, marking a period of some 18 years before investors saw the return of their money from 1966. (On an inflation-adjusted basis it was well into the 1990s before they recouped their money.) So much for "buy and hold".
For the period 1966-82 there were: five mini-suckers (average gain just under 15 per cent); two big suckers (average gain 38 per cent); and two really big suckers (average gain 75 per cent).
THE 2000-PRESENT BEAR
Once again, today's bear market and the 1966-82 bear market are as different as night and day. If there are similarities, they are with 1929-49.
This bear is far from over and we expect it will not make its final bottom any sooner than 2016, and we could go as long as 2020. Of course it may fool us and go on even longer, but based on our minimalist list of past big bears that is our current best prognosis.
As to how deep this one will take us, it is still anyone's guess. We suspect that the Dow Jones Industrials will at some point go as low as 4,000. That could occur on either of our two potential cycle anniversary dates of sometime in 2012 or 2016. That would make any low in 2020 a higher low. We have seen prognosis from super bears such as Elliott Wave guru Robert Prechter that the lows will be in the area of 1,000-1,300, and from Kondratieff Wave cycle analyst Ian Gordon, who also is calling for 1,000-1,300 for the Dow Jones Industrials. This is in keeping with a forecast that this bear market will test the highs of the 1966-82 bear market, which were in the 1,000 area.
We have said before that this bear shares some characteristics thus far with the 1929-49 bear. It is not replicating it, but we have some uncanny similarities. The Great Depression/War bear saw the first phase of its collapse top in September 1929 and bottom in July 1932. This time we topped in January 2000 and bottomed in October 2002. The collapse wasn't as devastating as in 1929-32, though: 40 per cent compared to 89 per cent (although the tech-laden NASDAQ lost over 80 per cent).
The 2000-02 fall was punctuated by numerous sucker rallies. We note five that we could call big suckers and a couple more mini-suckers. Only one had any duration: the 33 per cent rally out of the September 11, 2001 low that topped in March 2002. All of the others were swift ups and downs. Many of them had gains of over 20 per cent, while a couple of smaller ones were squeezed into the series of ups and downs that occurred between January 2000 and May 2001.
As with the 1930s that saw a really big sucker rally between 1932 and 1937, we had one between October 2002 and October 2007. There was a secondary low in March 1933 and again in March 2003. The 1933-37 rally subdivided into two phases and so did the 2003-07 rally. The first phase of the 2003-07 rally gained 46 per cent and the second phase gained 48 per cent from its lows in 2004 for a total gain from the 2003 lows of 93 per cent.
In 1937-38 there was a financial panic; in 2007-08 there was another. The current financial panic collapse saw a mini-sucker, a failed sucker and a big sucker before finding its most recent bottom in March 2009. What is different about this collapse is that while the 1937-38 panic did not take out the 1932 lows, this time we did take out the 2002 lows. This is telling us that this phase of the bear has far more potential to the downside. Our target of 4,000 could easily be seen by 2012 but in between there is the potential for at least one sucker rally and maybe two or three as the period is punctuated by a series of ups and downs.
The current rally is already up 26 per cent from the March 2009 lows. It already qualifies as a big sucker. We may have longer and further to go. We are looking for a rally that could take us to 11,000 to 11,500 over the next several months. But it could also tail off near 9,000. A rally of that former magnitude would see us up at maximum 78 per cent - really big sucker territory - or we could be up only about 40 per cent if the latter target is hit, a respectable big sucker.
The period 1938-42 saw four sucker rallies, three big suckers and a mini-sucker. Each rebound failed to take out the high of the previous rally. The final low in 1942 was only marginally below the low of 1938. This time we could be considerably below the March 2009 lows (6,443) if the 4,000 target were realized. Irrespective, the rules are the same. This is a period to restructure for longer-term investors. It is also a period for more aggressive investors to recoup some losses. But investors should never be fooled into believing that the bear market that got underway in January 2000 is anywhere near over. We are just moving into another phase.
The current rally has been running into resistance in the 8,000 area for the Dow Jones Industrials (850 for the S&P 500 and 9,000 TSX Composite). As we move towards the close April 9, 2009 we appear to be trying to close over this resistance zone. This is good news if the rally is to continue from here. Support for the DJI is important at this stage at 7,600/7,700, for the S&P 500 800 and the TSX Composite 8,700. Only firmly below these levels would we say the current rally is in trouble. But a close over these levels could turn us higher with targets in this move to 9,000 DJI, 900 and higher for the S&P 500 and 9,500/10,000 for the TSX Composite.
For the period 2000 to present there have been: three mini-suckers (average gain 15 per cent); six big suckers (average gain 25 per cent); and one really big sucker (93 per cent).
The current big sucker has already attained the average gain big sucker gain this decade but remains below the average big sucker of the 1929-49 bear (44 per cent) and the 1966-82 bear (38 per cent). Is there more to come or is this it for this phase?
China lending, money supply growth hit record highs
* New yuan loans surge to record 1.89 trln yuan in March
* M2 growth also accelerates to record pace
* Forex reserves see smallest quarterly rise since Q2-2001
* FX reserves fall by $32.6 bln in Jan and $1.4 bln in Feb
By Jason Subler and Zhou Xin
BEIJING, April 11 (Reuters) - China's new lending and money supply growth both surged to record highs in March, as banks continued their explosive credit expansion in support of the government's efforts to rejuvenate the economy.
Banks extended 1.89 trillion yuan ($276.6 billion) in local currency-denominated loans in March, bringing the total for the first quarter to 4.58 trillion yuan -- nearing the government's full-year target of at least 5 trillion yuan.
That helped lift annual growth in the broad M2 measure of money supply to a record 25.5 percent in March, up from 20.5 percent in February and easily exceeding economists' expectations of a 21.3 percent rise.
Liquidity surged despite the smallest quarterly rise in the country's foreign exchange reserves since the second quarter of 2001, reflecting slowing inflows through the trade surplus and foreign investment.
The reserves rose just $7.7 billion in the first three months, reaching $1.9537 trillion at the end of March.
Analysts saw the lending figures as a sign that Beijing's moves to boost domestic demand were working, but they also cautioned against jumping to the conclusion that a rebound was on the immediate horizon.
"China has completed over 90 percent of its full-year target for bank lending in the first three months, and this is absolutely not sustainable," said Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences in Beijing.
"In addition, I don't think we can say that the worst time for the Chinese economy is over," he said. "The March lending is strong, but whether the strong growth in bank credit can revive the real economy sector is still unclear."
One of the main concerns about the surge in lending has been that it could be financing stock market speculation as much as actual investment and spending, as reflected in the relatively high proportion of short-term bill financing in the totals.
Discounted bill financing, which firms use for short-term cash needs, accounted for 1.48 trillion yuan of the first quarter's new lending, or 32.3 percent of the total.
The People's Bank of China did not give a breakdown of the proportion for March, but it appears to have fallen, as the proportion was over 45 percent in February and about 40 percent in January, which economists would see as a good sign.
DIFFICULTIES REMAIN
The surge in growth in the narrower M1 measure of money supply, to 17.0 percent in March from 10.9 percent in February, will likely be taken by analysts as a sign that businesses and consumers are switching more money to demand deposits -- not included in M2 -- as they prepare to ramp up spending.
Ding Jianping, a professor with the Shanghai University of Finance and Economics, said the rapid increase in money supply was not unreasonable.
"At home, China needs strong money and credit growth to support the economy; looking abroad, other countries like the U.S. and Japan are also increasing money supply," Ding said.
China's economy has been hit hard by rapidly falling exports, but Beijing has launched a 4 trillion yuan ($585 billion) stimulus package to soften the blow by boosting investment and consumption.
Premier Wen Jiabao, speaking to reporters in Pattaya, Thailand on Saturday on the sidelines of a summit of Asian leaders, said that the economic situation was better than expected but that the government had to remain vigilant.
"China's economy has shown some positive signs, but we can all see that our economy still faces some very big difficulties," Wen said.
The external challenges to China's economy brought about by the financial crisis are reflected in part by the slower foreign exchange reserve accumulation.
The reserves fell by $32.6 billion in January, their biggest monthly drop on record, the central bank data showed on Saturday. They fell again in February, by $1.4 billion, then rose by $41.7 billion in March, yielding the quarterly increase of $7.7 billion.
"That is largely up to the external environment -- how much China can earn from its trade and how many capital inflows China will have are not decided by it," Ding said.
Singapore devalues currency after record GDP fall
By Nopporn-Wong Anan
Apr 14, 2009
Singapore (Reuters) - Singapore's central bank on Tuesday eased monetary policy for the second time since 2003 by effectively devaluing the currency as the government forecast a record economic contraction this year.
The Singapore dollar strengthened after the announcement as this policy option was the one most analysts had expected the Monetary Authority of Singapore (MAS) to take in order to weaken the currency to cushion the economy from the financial crisis.
The MAS re-centred the currency's secret policy band at the existing level of its trade-weighted index, a move economists estimate could imply a devaluation of anywhere between one and three percent.
The move came as Singapore's economy contracted a record 11.5 percent from a year earlier in the first quarter of 2009, more than a market median forecast of an 8.8 percent slump and deepening the trade-dependent city-state's worst ever recession. The government expects the economy to contract by between 6-9 percent this year.
"Given all these horrendous numbers, this policy change is not a big surprise. It is reflecting the free fall in external demand," said Song Seng Wun, economist at Malaysian bank CIMB in Singapore.
The country's gross domestic product in the first three months of the year fell at a seasonally adjusted, annualised pace of 19.7 percent, the ministry of trade said.
"MAS will therefore re-centre the exchange rate policy band to the prevailing level of the S$NEER, while keeping the zero percent appreciation path," the central bank said in its twice-yearly monetary policy statement.
The Monetary Authority of Singapore sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.
Goldman posts $1.7 billion profit, plans $5 billion offer
By Dan Wilchins
Apr 13, 2009
NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) posted higher-than-expected first-quarter profit as it took more trading risk and said it planned to raise $5 billion of common shares to help pay back government funds.
The bank also said it lost $1 billion in December 2008, mainly due to trading and investment losses.
The New York-based bank has managed to sidestep most of the worst of the financial crisis, having posted just one quarterly loss since the middle of 2007, even as competitors posted four or more quarters of losses.
For the quarter ended March 27, Goldman reported net income for common shareholders of $1.66 billion, or $3.39 a share, far exceeding analysts' average forecast of $1.49 a share, according to Reuters Estimates.
Goldman's income came in part because of strong client trading activity in fixed income, currencies and commodities, where the company posted $6.56 billion of revenue.
To some analysts, the results are a clear positive.
"It's another sign that the financial sector has gone through the worst," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management.
The results do not compare directly with Goldman's fiscal quarter last year, which ended on February 29, 2008, but in last year's quarter the bank posted net income for common shareholders of $1.47 billion, or $3.23 a share. Goldman and its rival Morgan Stanley (MS.N) switched this year to a fiscal quarter that matches the calendar year.
A RARE OPPORTUNITY
But the results were not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, a month not included in its fiscal 2008 results and not included in the official results for the first quarter.
"December was a rare opportunity for both Goldman Sachs and Morgan Stanley," said Brad Hintz, an analyst at Sanford Bernstein. "A single month, without any comparisons that can be made with any other months, so none of us will ever know what goes into the month of December. It's one of those rare opportunities that CFOs dream about."
Between the December losses and the subsequent profit, Goldman's tangible book value per common share was essentially unchanged from the end of November, at $88.02, the bank said. Tangible common equity is a measure of the bank's net worth, ignoring intangible assets such as goodwill.
A measure of the bank's trading risk, average daily value-at-risk, surged to $240 million in the first quarter of 2009, compared with $157 million for the three months ended February 28, 2008. Value-at-risk represents the average possible trading loss on 95 percent of the days in the quarter.
Goldman said it planned to use the proceeds of its share offering plus additional funds to repay the $10 billion of capital it received from the U.S. government under the Troubled Asset Relief Program. The bank would pay back the funds if supervisors permit and the bank is stress tested by regulators.
The bank has been vocal about its preference to repay TARP money as soon as possible. In February, Chief Financial Officer David Viniar said the bank is looking to avoid the restrictions that come with TARP.
"We would like to get out from under that," Viniar said.
Later in February, U.S. President Barack Obama signed a law that placed limits on executive compensation for TARP recipients. Goldman Sachs employees have traditionally been among the highest paid on Wall Street.
Asian shares advance despite plenty of fears
* Asia shares gain 1.5 percent on Goldman Sachs' profit
* Yen falls in a signal of rising risk appetite
* Asian auto maker shares slide on GM bankruptcy fears
* Oil below $50/barrel on worries about weaker global demand
By Rafael Nam
HONG KONG, April 14 (Reuters) - Asian shares rose to a six-month high on Tuesday after Goldman Sachs' stronger-than-expected profit signalled the worst could be behind for U.S. banks, emboldening investors to chase after riskier assets.
Asian credit markets continued to improve, while the yen, a currency that benefits during fearful times, fell to a six-month low against the Australian dollar.
However, there are also plenty of doubts about how much longer the rally in Asian stock markets can be sustained given that some analysts believe the full brunt of the deep global recession has yet to be reflected.
Singapore eased monetary policy to effectively devalue its currency after posting on Tuesday its worst quarterly economic contraction ever, while a forecast for weaker demand for oil by the International Energy Agency sent crudes tumbling to below $50 a barrel.
Asian automaker shares slid on fears General Motors Corp (GM.N) was being pushed into bankruptcy by the U.S. government, helping send Japan's Nikkei average .N225 down 1.3 percent.
"If GM were to go bankrupt, that would raise questions about what would happen to Japanese auto-parts makers and Japanese automakers' dealer networks. The implications are broad," said Takahiko Murai, general manager of equities at Nozomi Securities.
"Although the financial sector seems to have seen the worst, a recovery for manufacturers has been slow and worries remain."
The MSCI index of Asia-Pacific stocks outside Japan .MIAPJ0000PUS at one point hit its highest since mid-October, when shares were in the midst of a slide following the collapse of Lehman Brothers in the previous month.
The MSCI gauge was up 1.5 percent as of 0240 GMT,as major markets such as in Hong Kong .HSI and Australia .AXJO gained more than 2 percent each after a four-day weekend also seen in other Asian countries.
The gains came after Goldman Sachs Group Inc (GS.N) on Monday posted much higher-than-expected first-quarter profit as it took more trading risk, and said it plans a $5 billion common share sale to help pay back government funds.
The results followed Wells Fargo & Co's (WFC.N) surprising announcement last week that it expects to report a record first-quarter profit.
Though Goldman and Wells Fargo did not suffer as much as other U.S. financial firms, at least their announcements were seen providing some signs the U.S. banking industry is finally stabilizing after months of credit-related losses.
Markets in South Korea , Taiwan and Shanghai .SSEC were largely unchanged on the day.
NOT SO FAST?
The willingness to bet on riskier assets was also reflected in currency markets, where Australian dollar rose as far as 73.49 yen, its highest since mid-October, before slipping to 73.07, down 0.1 percent from late U.S. trade.
Currencies pairs such as the Australian and the New Zealand dollars against the yen have shown a high positive correlation with U.S share markets in recent months.
The U.S. dollar was steady at 100.09 yen, below last week's six-month high of 101.45 yen, and the euro eased 0.2 percent from late U.S. trade to 133.63 yen.
The euro also fell 0.3 percent to $1.3325, after climbing more than 1 percent in U.S. trade on Monday.
Plenty of potential pitfalls still lurk ahead, even Asian shares outside Japan have risen some 10 percent this year.
Citigroup (C.N), which had to resort to the U.S. government for financial aid during the crisis, reports earnings on Friday, as does U.S. blue chip General Electric (GE.N).
The fate of U.S. auto makers also remains a concern. The New York Times reported late on Sunday that the U.S. Treasury Department was directing GM to lay the groundwork for a bankruptcy filing should it fail to reach give-back deals with stakeholders by a deadline set by the Obama administration.
That sent Asian automakers such as Japan's Toyota Motor Corp (7203.T) and South Korea's Hyundai Motor (005380.KS) tumbling on Tuesday.
Regional bond prices are also pushing lower, sending up yields, given the expectations for a raft of new supply as governments seek to pay for massive spending projects by issuing more and more debt.
Japan's benchmark 10-year yield edged up 1 basis point to 1.460 percent, hovering near a five-month high of 1.490 percent hit last week after the government announced it would issue more than 10 trillion yen of debt in the year to March 2010 to finance a $154 billion stimulus package that is its its largest ever.
DOLLAR CRISIS IN THE MAKING, Part 1: Before the stampede
By W Joseph Stroupe
Mar 14, 2009
Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar. Instead, it will result from a correlation of forces arising out of the deepening global financial and economic crises, coupled with recurring and conspicuous miscalculation on the part of some of the world's political, financial and economic leaders.
The storm has the potential to cause upheaval on a grand scale, opening the door to swift, and largely uncontrolled, fundamental transformation.
As is widely recognized, the present financial order that is inordinately reliant on the US dollar must some day give way to a new order that is more balanced, stable, resilient and reliable, one that is based on multiple currencies and that therefore won't be plagued by the extremely dangerous structural drawback of an increasingly worrisome elemental single point of failure (the dollar).
But if the current dollar-centric financial order should become more seriously shaken than it already has been, perhaps even suffering a collapse, as a casualty of the present deepening global crisis, then the transition to any new global financial order is most likely to be disorderly, disruptive and unmanageable rather than gradual and orderly.
We can hope - but cannot be at all confident - that world leaders and global investors will act coherently, cohesively and intelligently enough in this crisis so as to ensure that the policies and actions being undertaken will not put at further serious risk the fundamental structure of the current dollar-centric financial order, and that they will instead be effective in bolstering deteriorating global confidence in the present order and in the safety of the dollar, at least until we get through this crisis.
Unfortunately, we cannot be confident that world leaders know what they are doing in seeking to resolve the crisis. Are their measures attacking the heart of the problem, or only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected measures, or by failing to enact certain required measures? Are they setting up conditions that make a dollar crisis and radically increased financial upheaval virtually inevitable, by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the present crisis?
If the dollar is being put at significant short-and medium-term risk by such measures, then we're seriously risking plunging the global financial order into a depth and breadth of transition that we cannot adequately control.
Investment, finance and economics are a complex mix of at times downright illogical human psychology with the pure logic of mathematical science, introducing possibilities for potent wild-card factors that must be taken into consideration in any calculation.
History provides many unfortunate examples of how the psychological components of uncertainty, fear and panic can, at crucial times, trump the components of logic, reason, knowledge and discipline to give impetus to shortsighted and risky policies and actions that create a full-blown crisis. Humans simply don't always act in a rational and logical way that is in their best strategic interests. And institutions, regulatory agencies and governments, being composed of humans, don't always act rationally either.
All are subject to the potent influence of human psychology, which can at times be quite defensive, knee-jerk, irrational and somewhat unpredictable. In a crisis situation such as we presently find ourselves, the darker side of psychology's influence is often and unfortunately magnified.
Added to this is the fact that global investment, financial and economic systems have become increasingly complex and interrelated much faster than the ability of experts and leaders to adequately comprehend them. This makes it much easier to make mistakes of real consequence. This complexity also at times prevents governments and other institutions from taking requisite bold, comprehensive actions in the midst of crisis for fear that these may backfire by producing some unforeseen and intolerable effects and repercussions.
Further complicating matters, investment, finance and economics are nearly always deeply intertwined with politics, adding to potential uncertainty - especially so in a time of deepening global crisis, when individual governments invariably lean toward self-interest, nationalism, protectionism and self-preservation.
To illustrate the disturbing truthfulness of the foregoing, remember when experts and leaders confidently concluded that the free markets could mostly regulate themselves with success; when they concluded that no housing bubble existed in the US, but only some "regional froth"; when they insisted that complex new mortgage-backed securities, including high-risk mortgage paper, dispersed throughout the financial and investment system, would decrease default risk.
Empty reassurances
Remember when the present crisis broke in 2007, the reassurances that it would not spread beyond the confines of subprime; when it did spread, the forecasts that Wall Street banks' losses would amount only to a total of about US$200 billion. Remember when "experts" insisted no widespread credit crunch would result. Remember when they insisted that the crisis was unlikely to spread from Wall Street to the real economy on Main Street?
Remember when they said the hundreds of billions of dollars of liquidity thrown into the system would free up the credit seizure. Remember when they said the October 3, 2008, $700 billion stimulus package and the many more hundreds of billions of dollars in bank and corporate bailouts would move the system out of crisis. Where are all these pseudo-intellectual ideas, beliefs, ideologies, assessments and assurances now? On the trash heap, precisely where they belonged in the first place.
The record inspires little confidence in the ongoing efforts of governments to resolve the crisis, or even that they know how to resolve it. The damage and outright destruction inflicted on vital components of the present global investment, finance and economic orders just keeps piling up while governments keep trying their various "solutions".
As for the newly passed $787 billion stimulus package, and its accompanying sketchy bank rescue plan, economists and the markets widely doubt whether the two measures are potent enough and targeted accurately enough to come anywhere near accomplishing their stated aims.
The same is true of the perpetually disjointed and half-hearted efforts of the Group of Seven (G-7) leading industrialized nations, whose most recent confab in Rome ended with the customary whimper. In addition to its historic impotency, the G-7 is now being almost totally emasculated by the broader Group of 20 nations, to which has fallen the task of designing and constructing a new global order to replace the present broken one. If you concluded based on the hard facts that this crisis is spinning increasingly out of control in spite of, and in some important ways due to, the efforts of governments to resolve it, you would not be far wrong.
Investors, both private and official, around the globe have generally given in to a crisis reflex psychology of extreme risk aversion and have been clutching the US dollar ever more tightly, massively running into Treasuries as a refuge in the mounting storm. This fact would seem to imply that global confidence in the dollar is still fundamentally sound, despite the well-documented bruises it has received over the past few years.
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.
Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.
The emerging markets and their banks and governments are suffering under increasingly tighter credit strangulation and mounting financial and economic losses, with skyrocketing risks of default, due to the tightening global credit seizure. And US and European commercial credit not explicitly backed by governments is also suffering likewise. As if that dangerous situation were not bad enough, the massive spending and debt issuance policies being embarked on by the US government only greatly exacerbate the increasingly unstable situation for all these players.
By facilitating and encouraging the massive global flight into Treasuries, and by issuing a huge new supply of US sovereign debt, emerging markets, their governments and banks, and US businesses are deeply suffering. As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all. Investors are demanding very high yields to exit the relative "safety" of Treasuries to invest in corporate and government bonds in the emerging markets and in large swaths of the US and Western Europe as well.
These increasingly high yields demanded by investors translate into high costs and mounting losses by banks across the financial system. The situation is moving rapidly to a potential massive wave of bank, corporate and government defaults. Eastern Europe is on the very precipice as a result. If such already severely weakened emerging market governments, banks, businesses and US corporations do default, they will place enormous new pressures on European and US banks which are either heavily exposed, or not sufficiently immunized, to the risks.
The global credit markets and financial systems are deeply interconnected, meaning that contagion spreading from an Eastern Europe default to the rest of Europe and the US is virtually assured. So those pressures will be felt by the entire global financial order, and such new and profound stresses upon an already extremely shaky order won't likely be endured without a genuine meltdown of the entire system.
These huge and dangerous distortions in the global financial order are due largely to US government policies regarding Treasuries and the shortsighted willingness of global investors to participate in pumping up that profoundly harmful bubble. If the US succeeds in selling its greatly increased supply of Treasuries, then such distortions in the global order will only become more profound, their negative repercussions (credit strangulation) will only become much more potent, and the feared second wave will be virtually assured. And so far, demand for Treasuries has remained high, thereby ensuring the dangerous persistence of the credit strangulation referred to here.
That second wave, if it comes, will also carry profoundly negative repercussions for the Treasuries bubble itself, because the US and Europe will be plunged into undeniable, full-blown depression via a financial meltdown by the heavy burden of the cascading effects of default in Eastern Europe. That eventuality will force global investors to finally begin to evaluate the safety and appeal of Treasuries and the dollar based much more on the swiftly disintegrating fundamentals of the US economy and much less on a psychological reflex, driven by extreme risk aversion, that at present corrals investors into Treasuries for their supposed safe-haven benefits.
The stampede in the making
Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.
Replay the recent histories of the chaotic housing and the commodities bubble bursts. Global investors, at the behest of enthusiastic governments, largely ignored the inevitable risks and piled into these assets on a grand scale, with the hottest interest coming just before the burst occurred. The environment of very low global interest rates and a massive global credit excess set the stage for enormous investor profits on these gigantic and mushrooming asset bubbles.
But when mounting inflation obliged the Fed to begin to steadily hike interest rates, the housing bubble began to burst in late 2006. As the dollar weakened under mounting inflation and loss of its appeal as a safe store of wealth, global investors piled ever faster into commodities for safety and for profit, inflating that bubble to gigantic proportions by the summer of 2008, when oil nearly reached $150 per barrel.
Then, when the global recession emerged later that summer, investors realized global demand and prices for commodities would plunge, so they stampeded out of commodities and into Treasuries, and the commodities bubble burst. Both bubble bursts left a great deal of wreckage in their wakes, with asset values collapsing, pulling businesses, banks and even governments into the abyss.
Though the present Treasuries bubble is more about safety than it is about profit, the fundamental risks associated with bubbles still apply to it. The bigger it gets, and the more reliant upon it as a safe store global investors become, the more unstable it turns out to be because it becomes more sensitive to various factors, both internal and external, both real and psychological.
The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.
So, no one should assume that the present crisis will moderate or move toward resolution just because global demand for Treasuries might remain high in coming months. That would only signal that the Treasuries bubble is growing more massive, and that the distortions in the global financial order are only becoming more profound and dangerous, threatening to bring in a second wave of destruction, and that the bubble is therefore much nearer to bursting. This constitutes a potential perfect storm against the dollar and against the present global financial order that no one wants, but no one is seeking to prevent either.
DOLLAR CRISIS IN THE MAKING, Part 2
: The not-so-safe haven
Official and popular analysis of the predicament facing the US dollar has for the most part been distinctly unwilling to come fully to grips with the stark truth about the real nature of this deepening crisis and the escalating risks that are surfacing. Far too much optimism and wishful thinking, and scarce courageous realism, is a recipe for an even worse disaster than the one we're suffering at present.
We have seen in Part 1 the profound risks of a dollar crisis being triggered if global demand for US Treasuries remains high and that the debt bubble persistently and destructively sucks all the air out of the global credit markets. However, if global demand for Treasuries is not sustained at a very high level, there exists an entirely different, yet equally destructive set of impending and mounting risks that a dollar crisis might be triggered.
Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.
The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.
As China Banking Regulatory Commission deputy head Luo Ping stated on February 12, in his own reactive-style retort to the unfolding crisis, Treasuries are just about the only safe-haven option in perilous times. However, his clarification on the next day appeared a bit less knee-jerk and more rational, stating that gold and selected government bonds (but not those of the US) look more attractive to China from a risk assessment standpoint, because China rightly fears its dollar-denominated holdings will almost certainly be inflated away over time by the US policy of issuing huge new sums of dollar-denominated debt in the form of Treasuries.
This brings us to the crux of the matter of escalating risks for the dollar. In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens and more money than anticipated is required to rescue the financial and economic sectors from ruin, or if virtually the entire financial sector has to be nationalized to prevent a total collapse. That is a prospect that is swiftly becoming more and more likely. A running estimate by Bloomberg News recently put the total so far of all the new sums of dollars the US government has spent, lent and/or committed to spend due to this crisis at about $9.7 trillion and counting!
To deal with a crisis that fundamentally arose, at length, out of the escalating risks of shortsightedly spending in colossal sums of dollar-debasing debt, the US government is attempting to "solve" the crisis by frantically spending gigantic additional sums of new dollar-debasing debt. Before this crisis spending binge was undertaken, the dollar's strength had already been greatly undermined over the past four decades by a combination of shortsighted dollar-debasing government policies and the accumulation of huge sums of debt since the 1980s.
According to official calculations, it required $5.54 in 2008 to equal the purchasing power of just $1.00 in 1970. This comparison illustrates the potency of inflation in undermining the value of a mere fiat currency such as the dollar.
But now, the US government is risking setting in motion inflationary forces that are profoundly more potent and difficult to manage. Virtually every economist on the planet calls this situation one that has the real potential for seriously and permanently damaging the dollar by inflating away too much of its remaining value not very far down the road. They also warn that, specifically due to the extremely risky monetary and budgetary policies now being embarked upon, the timing will be absolutely crucial for future Fed watchfulness and actions aimed at preventing a catastrophic, uncontrolled rise in dollar inflation.
They further warn that the severely weakened US financial and economic systems will be very slow to recover strength and stability and will likely be unable to withstand the tightening measures that will be needed further down the road so as to keep inflation from running out of control. The US may therefore be condemning its own currency to collapse by enacting such shortsighted policies.
In spite of such warnings, extremely potent inflationary, dollar-debasing policies are being enacted anyway. Is this the picture of a fundamentally sound global financial and economic superpower worthy of international respect, confidence and trust, or the picture of an erstwhile global financial and economic empire that is even now falling over the threshold into collapse? This is absolutely a valid question to pose at this juncture. Why?
What's the salient point here? International trust and confidence in the monetary, financial and economic policies of the US government are far more crucial now, right in the midst of this deepening global crisis, than at any previous time in history because these policies will directly and indirectly affect the dollar, either for good or for bad. Since the dollar does still constitute the central framework of the present global financial order, and since the shaking of present order is only intensifying, international confidence and trust in the dollar as a safe store of wealth is absolutely essential.
If that trust and confidence in the dollar should be sufficiently undermined anytime soon by risky policy, then the present global crisis will almost certainly turn into a global catastrophe - the perfect storm against the dollar alluded to in the introduction of this article. The importance of international trust and confidence cannot be over-emphasized for the dollar, a mere fiat currency that is backed by no hard assets at all (such as gold), but only by the pledge of the US government to stand by it and not to default on its international debt.
The massive global rush into the dollar as a safe haven would appear to indicate that we don't have much to worry about respecting international trust and confidence in the dollar. That might well be true if it could be clearly established that such a global move has been strategic in nature and well thought-out and as such has come as a result of rationality, logic and reason much more than being merely a tactical move as a result of fear and panic. Some important questions must be posed here:
• Are investors such as China, which likely holds 70% of its reserves in dollar-denominated assets, satisfied to remain in the dollar for the foreseeable future, and satisfied to increase exposure to the dollar, or do its central bank governors increasingly find themselves having to hold their noses, as it were, with respect to their exposure to the dollar? Is their concern flaring?
• Are global doubts and fears mounting with respect to the appeal of the dollar as a safe store of wealth beyond the short term?
• If the answer to the question above is yes, then is the appeal of the dollar being undermined mostly because of fears over the potential effects of the dollar-debasing policies that are now irreversibly being implemented in Washington?
• Are key investors like China's central bank increasingly looking for ways to reduce exposure to the dollar?
• Is the dollar facing significantly increasing competition from other safe haven stores of wealth, such as gold?
Gold's increasing appeal as a safe haven, demonstrated by its ongoing surge, adequately answers the last question. From the start of January 2009 until mid-February, gold has surged from around $800 per ounce to near $1,000 per ounce and is likely to rise further. This surge coincides with the raft of official data releases since the start of 2009 that demonstrate the US and global financial systems and economies are moving deeper into crisis. Investors increasingly see the value of investing in hard assets, and in times of uncertainty and crisis gold and other precious metals are usually the ultimate investment in that category.
As for the answers to the remaining questions posed above, even before Premier Wen Jiabao last week publicly warned the US of his government's concern about the safety of China's US holdings (see Wen puts US honor on the debt line, Asia Times Online, March 14, 2009) consider the recent comments of Luo Ping, China's Banking Regulatory Commission deputy head, referred to above:
"We hate you guys. Once you start issuing $1 trillion-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
Also note the recent comments of Yu Yongding, a prominent former advisor to China's central bank, as reported by Bloomberg News on February 11, 2009:
China should seek guarantees that its $682 billion holdings of US government debt won't be eroded by "reckless policies", said Yu Yongding, a former adviser to the central bank. The US "should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way," said Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences
Also, as reported by Bloomberg News on February 11, 2009:
China may voice its concerns over US government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on February 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation's third-largest lender by assets. "In talks with Clinton, China will ask for a guarantee that the US will support the dollar's exchange rate and make sure China's dollar-denominated assets are safe," said He in Beijing. "That would be one of the prerequisites for more purchases."
Now, note the clarification offered by Luo Ping on the next day, as reported by Reuters News Service:
Buying US Treasury bonds is an option - but not the only option - for China, which is aware that huge debt issuance by Washington would reduce the value of China's existing portfolio, a banking regulator said in remarks published on Friday. In an elaboration of his remarks, the China News Service paraphrased Luo as saying: "Compared with gold or bonds issued by other countries and regions, US Treasury bonds are still an option (for China). But if the US government issues a large amount of Treasury bonds amid efforts to deal with the economic crisis, all investors who hold US Treasuries will suffer losses."
Now, note these statements made by Chinese officials, advisors and experts as reported by the official Xinhua News Agency on February 18, 2009:
"To rescue the ailing US economy by increasing government borrowing will create a record-high federal deficit," said Yu Zuyao, economist with the Chinese Academy of Social Sciences, a government think tank. "This can further lead to catastrophic consequences such as serious inflation and US dollar depreciation," he said Tuesday. China faced high depreciation risk to its foreign exchange reserves, US Treasury bonds and other US dollar-denominated assets, Yu said.
With regard to whether Chinese advisors and experts think the US government is creating a dangerous and unstable Treasuries bubble, note this statement:
"Buying US government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the US economy itself, indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities. [italics added]
Chinese officials express mounting alarm at the likely negative near-to-medium term effects upon the dollar, and upon their huge reserves, of the spend-spend-spend policy emanating from Washington:
The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation." Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.
A weaker US dollar would hurt that currency's international status, he said, which would "not be in the interests of the United States and other countries and would exacerbate the crisis." Said Zuo: "US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size."
In a strong hint that China's central bank won't be adding to its holdings of Treasuries at anywhere near the rate it did in 2008, that it may already have clandestinely achieved more diversification out of the dollar than is widely known, and may well find ways to further decrease its holdings without explicitly telegraphing its moves, note this statement:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added.]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds, will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
The foregoing quotes beg the following questions:
• What about the widely held view, which is even at times recited by Chinese central bank officials themselves, that says China has no choice but to maintain its holdings of Treasuries and to keep buying more, lest any significant slowdown in its rate of purchases risk triggering a global dollar panic?
• Is that view correct, or does China's central bank actually have other viable options, as Luo Ping and other officials insist that it does?
• What might those other options be, are they really viable, and what might happen to the dollar if China's central bank began to exercise its professed "other options"?
• What kind of scenario might prompt China's central bank to attempt to do so?
• Could its enactment of "other options" be carried out in a way that would be difficult to trace, so that China would avoid triggering a dollar panic while it steadily reduced its exposure to the dollar over the coming months?
Saying "goodbye!" sooner, not later
With respect to whether China will continue to purchase Treasuries at anywhere near the same rate at which it has in the recent past, a new and fundamental problem is arising. Its significantly slowing economy is causing a rapid slowing of the rate of growth of its reserves, which makes much less new reserve accumulation available, and therefore also undermines the need for the purchase of Treasuries. Experts state that even if China's central bank uses all of its new accumulation of reserves each month to purchase Treasuries, the sums it would purchase would still fall.
Additionally, China must now fund its new $585 billion domestic stimulus package, and that will only further decrease funds available for the purchase of Treasuries. Therefore, its rate of purchase of Treasuries will almost certainly decline significantly from here forward.
This potentially potent new fundamental comes into play at the most inopportune time for the US, when it intends to sell perhaps as much as $2.5 trillion in Treasuries this fiscal year alone. The question that begs an answer, and that is increasingly being asked around the globe, is who's going to buy this huge new supply of debt? Certainly not Japan, for its exports are plunging, as is its new reserve accumulation, as it suffers a severe economic contraction at an annual rate of 12.7% according to the latest figures.
It certainly appears likely that as new Treasuries flood the market, the point could soon be reached where supply outstrips demand, causing yields to rise. The Fed is trying to keep yields as low as possible so as to attract big buyers that already have large holdings of Treasuries, such as China. For such holders of Treasuries, rising yields would ravage the value of their holdings, making the purchase of yet more Treasuries distinctly unattractive. Yet, lower yields tend to be less attractive for new buyers, except in the case where such a buyer is suffering from strong risk aversion and is looking, not so much for profit, but rather for a safe haven.
Therefore, minus the environment of extreme risk aversion that still plagues the markets, the US is caught between multiple contradictory interests. On the one hand, it wants to keep yields low so as to attract buyers such as China to purchase significantly more Treasuries. On the other hand, it needs higher yields to attract many new buyers because the big buyers are becoming much less able to keep up their purchases, let alone increase them. But those higher yields would almost certainly force investors such as China's central bank to begin to more quickly divest themselves of Treasuries - or risk seeing the value of the dollar-denominated portion of their reserves eaten away.
The biggest factor that has so far prevented a destructive collision of all these conflicting interests is the persistence of extreme risk aversion in the markets, causing a global rush into Treasuries as a safe haven.
If that extreme risk aversion were to subside, then investors holding Treasuries and prospective new buyers of Treasuries would be lured instead to investments that offer greater profit potential. The yields on Treasuries would have to rise in order to attract buyers, but that would undermine the value of investors' holdings of Treasuries, which would in turn drive them to sell out in favor of better safe stores of wealth. As yields rise rapidly, prospective buyers would likely stay on the sidelines to wait for the best deal rather than jump in too soon only to see their holding ravaged by yields that continue to rise.
The yields would rise yet further on the falling demand for Treasuries, and the downward spiral would feed into itself in a stampede out of Treasuries and the dollar. What I am describing here is a bursting of the Treasuries bubble. It would most likely be disorderly and chaotic.
But such a bubble burst for Treasuries could come about even if risk aversion persists, or perhaps intensifies, in this deepening global crisis. What if investors become more worried about the safety of Treasuries, fearing, as China's central bank increasingly does, that the flooding of the market with huge new sums of US debt will inevitably inflate away the value of their Treasury holdings? Or what if the costly new US stimulus package and bank rescue fail, and the US descends into a much deeper recession or a full-blown depression and is forced to nationalize virtually the entire financial sector, stoking fears that the US government may have no choice but to default on at least a portion of its gargantuan debt?
In that case there is a real threat that investors will begin to transfer their risk aversion strategy from focusing on Treasuries and the dollar to focusing on something else that is deemed much safer - perhaps including hard assets like gold and other precious metals and commodities. If US gross domestic product (GDP) deteriorates significantly further than it has already, the dollar will become much more vulnerable and will likely fall as investors begin to value the safe haven currency more in line with the fundamentals of the US economy. Then, the same self-reinforcing downward spiral described above would likely come into play, and the Treasuries bubble would burst in chaotic fashion in an investor stampede to havens safer than the shaky dollar.
One can begin to see how very tentative is the dollar's recent appeal as a safe haven in the mounting storm. In verification of that fact, investors have been piling into short-dated Treasuries for the most part, for two reasons. First, these assets are less vulnerable to the ravages of higher yields, which tend to hit the long-dated Treasuries earliest and hardest. Second, the short-dated assets facilitate a quick exit in the event that it is deemed justified. When taken together, these two factors are not a very solid vote of confidence in Treasuries and the dollar.
DOLLAR CRISIS IN THE MAKING, Part 3: China inoculates itself against dollar collapse
There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.
There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.
The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.
One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.
Another expert whose ongoing work is also adding very important, deeper insight into such matters is the highly respected Rachel Ziemba, lead analyst on China and the oil exporting economies at the prestigious RGE Monitor, founded by Nouriel Roubini.
Drawing on the work of these two experts, let's examine the matter of the likely size and composition of China's forex reserves and its investment options going forward, and the probable implications of those options for the dollar.
The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.
As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.
As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:
And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries. The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.
That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China's standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.
In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That's a very tall order indeed - but it is not by any means impossible. How so?
If we stand back to look at Setser's work from a distance, we see what appears to be a clear strategy on China's part that is potentially very compelling. The country has its official reserves, which it acknowledges now total about $1.95 trillion, and it also has its unofficial or secret reserves, which Setser estimates at about $450 billion at present.
Coincidentally (or perhaps not merely coincidentally) the secret reserves total about the same sum that China needs to divest itself of in order to reach the desired composition of its reserves noted in the previous paragraph - about $450 billion. At this point, recall the intriguing and potentially very important statement quoted earlier (see DOLLAR CRISIS IN THE MAKING, Part 2), a statement made by Fang Shangpu, deputy director of the State Administration of Foreign Exchange and reported by the Xinhua News Agency on February 18, 2009:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
Is Fang Shangpu hinting that China has intentionally, as a deliberate strategy, divided its reserves into two general holdings, official and secret, and that SAFE (the State Administration of Foreign Exchange) has ensured that the composition of the official (government) holdings of the $1.95 trillion is such that its exposure to the dollar is not the roughly 70% assumed in the West, but rather something much closer to the desired target of 50%, while the secret reserves hold predominantly dollar-denominated assets?
If this is the case, then China could employ a number of schemes to clandestinely further reduce its total exposure to the dollar, using its secret reserves, all the while maintaining safety for the official reserves. Note Fang Shangpu's recent statement to the Wall Street Journal regarding how carefully, and with what foresight, China manages its reserve holdings:
"Since the subprime crisis evolved into the international financial crisis in September last year, we have executed the central authorities' plans to cope with the international financial crisis and launched the emergency response mechanism. We have closely followed developments, made timely adjustments to risk management, taken decisive and forward-looking measures to evaluate and remove risks ... "
Chinese officials have been painfully aware, for several years now, of the increasing risks of too great an exposure to the dollar. It simply isn't believable that their level of prudence and foresight in this regard was so low as to allow them to fail to formulate and execute strategies designed to limit that exposure to safer levels than is presently assumed in the West. But if China has indeed prudently and deliberately structured its official reserves (now totaling $1.95 trillion) to be much less exposed to the dollar than is assumed in the West, while off-loading the riskier, dollar-denominated assets into its secret reserves, how might it propose to use those secret reserves to further decrease its exposure to the dollar?
Conversion into resource reserves
Enter China's resource buys. Several Chinese experts have been saying that China needs to spend a significant portion of its dollar-denominated reserves on hard assets, thereby further reducing its exposure to the dollar. It certainly appears that China is embarking upon just such a strategy.
According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. This is made evident by the recent February 23, 2009 report by China Daily which stated the following:
As part of the National Energy Administration's three-year plan for the oil and gas industry, the government is considering setting up a fund to support firms in their pursuit of foreign mergers and acquisitions, the report said.
Fang Shangpu, deputy director of SAFE, the State Administration of Foreign Exchange, said earlier this week that more measures will be introduced to support firms seeking to expand overseas.
Veteran analyst Han Xiaoping said the time is now ripe for China to convert some of its capital reserves into resource reserves, as global oil prices have fallen 70% since last year, to about $40 a barrel. [Italics added]
"We shouldn't miss this opportunity to use our foreign exchange reserves to build up our oil stocks," he said.
Jiang Jiemin, chairman of PetroChina, said recently: "The low share prices of some global resource companies provide us with some fresh opportunities."
RGE Monitor's Ziemba says the resource buys are a smart move now because they decrease the role of increasingly uncertain financial assets such as Treasuries, which now carry little profit appeal and diminishing appeal as safe stores of wealth, and increase the role of hard assets, which now carry an ever greater profit potential and a mounting appeal as safe stores of wealth: "For China, these investments seem to be a relatively efficient way to use its financial resources given the likely long-term appreciation of resource prices and uncertainty about financial assets."
Ziemba, in response to questions e-mailed to her, also alerts us to watch for forthcoming details about the currencies employed in China's resource buys. If these deals are being transacted largely in dollars, then she notes that there will likely be no negative near-term effect upon the dollar's role as the world's reserve currency. But if they are arranged outside of the dollar, it might well serve to undermine the dollar's international role to some extent.
However, it should be noted that almost no matter what currencies these resource buys are being transacted in, there does exist a potential negative impact for the dollar itself further down this path. How so?
Obviously, with China's uncomfortably large present exposure to the dollar, it is in its interests to concentrate on converting much of the dollar-denominated portion of its secret reserves into resources reserves. In other words, China will undoubtedly spend dollars, whether directly or indirectly, to fund its resource buys. But it must do so in a largely opaque manner that leaves little, if any trace in official data such as the US Treasury's TIC report. It will also be likely to be a net buyer of Treasuries, though nowhere near its 2008 pace, or else refrain from selling significant amounts of Treasuries, while it clandestinely reduces its exposure to the dollar. Otherwise, its actions could spark a dollar panic.
Increased buying of Treasuries by US citizens and investors, and by various foreign investors other than China, as the global crisis rapidly deepens and increases risk aversion, may likely take significant pressure off of China to soak up the huge issuance of new sovereign US debt now getting underway. That will help to provide breathing room for China to address its problem of reducing exposure to the dollar.
Whether China will approach the problem with a scheme of swaps amongst its various state-controlled entities and wealthy private Chinese investors, or by some other nearly opaque means, probably cannot be determined with any certainty at present. But it has undoubtedly worked out the problem of clandestinely converting significant sums of its dollar-denominated financial assets into hard assets without dumping Treasuries and triggering a dollar panic.
It is most unlikely, therefore, that its actions in this regard will be sufficiently proved before it has already succeeded in accomplishing its goals. Furthermore, since resource prices are now very attractive, China will certainly expand and accelerate its resource buys while prices remain attractive, converting ever-larger sums of its dollar-denominated reserves into resource reserves.
If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.
What about the problem of dealing with any ongoing accumulation of dollars? A number of analysts note that China's trade surplus is worsening even in the global slowdown because, while China's exports are falling, its imports are falling much faster. However, Chinese officials have made clear that they will use their reserve holdings to bolster imports, and that measure should alleviate China's need to accumulate large sums of dollars and other currencies in order to keep the yuan stable.
China is extremely unlikely, therefore, to accumulate dollars at anywhere near the rate at which it did in 2008. China is also funding its domestic stimulus package designed to spur domestic consumption. All these measures denote a much wiser use of its huge reserves and a steadily decreasing focus on the dollar. All in all, China looks set to weather the storm quite well in spite of some significant hardships along the way.
Summarizing the escalating risks of a dollar crisis
The bubble in US Treasuries is getting increasingly massive and unstable with each week that passes. Deepening global risk aversion is keeping investors lined up, so far, to buy Treasuries - especially short-dated ones. And the deepening economic crisis in the US is moving its own citizens to join in the buying spree.
If the Treasuries bubble persists for much longer, and especially if it continues to mount, the massive and dangerous distortions in the global financial system and the Treasuries-induced strangulation of its credit markets will only become more severe, likely leading to a meltdown somewhere in the emerging markets, one of whose effects will almost certainly spread to engulf the severely weakened Western European and US financial sectors and plunge particularly the US economy into a deep depression, with potent negative effects upon the dollar.
Such an eventuality will tend to force global investors to evaluate the safe-haven appeal of the dollar based much more on the fundamentals of the US economy, and that will portend a stampede out of the dollar and a potentially chaotic bursting of the massive Treasuries bubble. Hence, even if the US finds buyers for its huge sums of new sovereign debt now beginning to flood the markets, the picture does not look good for the dollar beyond the short term.
Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.
Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.
When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.
Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.
Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered.
This risk, though perhaps not major, does exist nonetheless, and it is significantly increasing as China undertakes new measures that might attract undue and unwanted global attention. However, it is also likely that China will enjoy cover and gain breathing space to enact its prudent measures while much of the rest of the world continues to rush into the bubble.
Notes
1. See "China's Record Demand for Treasuries in 2008", by Brad Setser, The Council on Foreign Relations.
2. See "China's Resource Buys" by Rachel Ziemba, RGE Monitor.
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
Making sense of Thailand’s turmoil
By Roberto Herrera-Lim
04/09/2009
Bangkok's streets are again filled with protesters this week in what will likely prove a boisterous but futile attempt to force the government's resignation. But behind all the noise, former Prime Minister Thaksin Shinawatra, who has been directing these demonstrations from outside the country, may well have a more subtle, longer-term agenda.
Thaksin and his supporters have been attacking the country's "aristocracy"--and top adviser to King Bhumibol Adulyadej, Prem Tinsulanonda, in particular. This suggests that Thaksin's maneuvers are related less to any effort to immediately oust the current government but instead to undermining the power structures centered around the monarchy, particularly the King's privy council, and the succession process that Thailand will face once ailing King Bhumibol passes from the scene.
The protests are generating more noise than usual thanks to warnings from Thaksin that "the time for talks has passed" and the sense that protesters (known as "red shirts") are pushing for a confrontation. The former prime minister, ousted in a 2006 coup, is still able to create tension in the capital by rallying his supporters from Thailand's northeast and among Bangkok's poor. But without support from the military, the monarchy, and Bangkok's middle class, these protests are highly unlikely to divide the country's political elite and threaten the current regime. Even Thaksin's allies know that even if they could force new elections, the elite-controlled institutions could undermine their administration. Thaksin is believed to be in either Dubai or Cambodia, and evidence suggests that the military is trying to block his satellite telephone calls to followers inside Thailand.
The real motive behind Thaksin's use of these protests is probably to weaken Prem, which would then allow him to position himself to eventually take advantage of a government weakened by the economic crisis, to negotiate his return to the country, and to settle his many outstanding legal and financial problems. The big unknown is whether Thaksin's moves reveal that he has inside information on how and when the succession process (and resulting power struggle) will begin to unfold, and whether his rhetoric is an attempt to position himself in the conflict for power that could follow.
To up the ante, Thaksin has warned that he expects to see a "revolution by the people" that is more intense than the civilian unrest that rocked the country in 1973 and 1992. He has also explicitly accused Prem and retired General Surayud Chulanont of having organized the 2006 coup that ousted him from office.
These are bold (and unprecedented) criticisms, because Prem has been considered for the past decade a direct representative of King Bhumibol and therefore beyond this kind of accusation. Protesters have organized demonstrations near Prem's home. By proving that he still commands considerable public support and boldly attacking Prem (and members of the military complicit in the 2006 coup), Thaksin may well be trying to establish himself as a political force to be reckoned with following the King's death-particularly if the succession process fails to produce a strong monarch.
In short, Thailand is in the midst of a power struggle that could reach deeply into its institutions and power structures. It started with a fight between the elites and Thaksin in 2006, and has begun to spill over into the public sphere. The stakes have been magnified by the uncertainty around the royal succession in a country in which the monarchy remains the most powerful political institution. Thailand's history shows that this type of conflict will take time to resolve, with results ranging from the absurd to the tragic.
Dispatch from the G20: Near-term promise and longer-term trouble
by Ian Bremmer
04/06/2009
The growing vulnerabilities of emerging markets to social upheaval and state failure as a result of the financial crisis is probably the most significant risk the world will face this year. That's why last week's G20 decision to significantly expand funding for the International Monetary Fund was so important -- and part of why the meeting itself was successful. This success is especially obvious once we accept the limits of what this forum can really accomplish. An urgent call for help was answered, but there was never any real chance that leaders would use this meeting to remake the international financial and economic order in a way that genuinely reflects the shift of recent years in the global balance of political and economic power.
But the seeds have been planted for longer-term problems. Chinese President Hu Jintao said very little during the event but was given an enormous level of respect by the other G20 participants and the media. This reflects the reality that many are now ready to accept China as a superpower. For the near term, this change will prove useful, because China has the money to help fund existing international financial institutions shepherd vulnerable countries through their domestic economic problems. But longer-term, it may become a problem, because China isn't fully ready to play this role and because China's leaders have fundamental disagreements with the leaders of other powerful states on how the global economic system should be governed.
Looking ahead, the broader promise of a G20 remaking the international order for long-term sustainability remains unrealistic. Reimagining the architecture of any multinational effort -- not just of financial institutions but of the nuclear non-proliferation regime, the composition of the United Nations Security Council, efforts to stop the international flow of illegal drugs, agreement on a single definition of "terrorism," a successor to the Kyoto protocols that will have a meaningful impact on climate change, and other difficult issues. That's just not possible in today's geopolitical environment.
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