A whole lot of shaking went on over the last few months. China’s stock market continued its free fall, China’s central bank, the PBOC, devalued the Yuan and then lowered their interest rates. All eyes were on China as their actions shook world markets and economies, driving down commodities and emerging market economies. Few believe China’s troubles are over and now other nations must adjust to slower growth in China, a country which, for the last twelve years, has been a central growth driver of world markets. Many of these nations, especially larger economies like the EU, Japan and the US, were already struggling to generate their own consistent growth. In addition to the PBOC, many of the largest central banks also made major decisions this week; the Fed didn’t raise interest rates, Bank of Japan (BOJ) and European Union Central Bank (ECB) both decided to expand their own quantitative easing programs of lowering interest rates and printing money.
Odds of BOJ Stimulus Boost Increase for Next Month (9-10-15) Bloomberg Video
Draghi Unveils Revamped QE Program as ECB Downgrades Outlook (9-3-15)
Here’s What Street is Saying About the Recent ECB Decision (9-3-15)
The PBOC devalued their currency by 2% on Tuesday Sept 8th, and by Friday, four days later, it had fallen an additional 4%, making Chinese exports 6% less expensive across the board. These events have caused a ripple effect across world markets and many believe this will reignite the world currency wars. Currency wars occur when a nation’s central bank purposely devalues their currencies to make their exports more affordable and attractive, causing other nations to follow suit in order to stay competitive. Another probable reason for the devaluation is the IMF’s September meeting when they will discuss adding China to their list of reserve currencies, which would greatly benefit China.
(The following articles and interviews (most are 2-3 mins) will provide you with insight into the effects of these changes in world markets and economies. Especially listen to the first interview and the head of Merrill Lynch Currency Research)
China’s Yuan Move It’s Just the Beginning (8-11-15) Bloomberg Video
China Rattles Markets With Yuan Devaluation (8-10-15)
Second Day as Yuan Tumbles With Stocks (8-11-15)
Yuan Drops for Third Day After PBOC Reference Rate Declines 1.1% (8-12-15)
Reignite Asian Currency Wars (8-11-15)
Federal Reserve Does Not Raise Interests Rates
“Treasuries rallied while the dollar tumbled to a three-week low after the Federal Reserve decided against curtailing stimulus. U.S. stocks retreated as the decision fueled concern that slowing global growth could hamper the domestic economy.” -Bloomberg
The Federal Reserve decided not to raise interest rates, because of the lack of inflation, economic slowdown and global uncertainty. As expected the USD fell in value, but what was unexpected is the market went down 355 points after the decision, when historically it should have risen with the understanding that interest rates were not going up. The emerging market nations all breathed a sigh of relief, because, had US interest rates gone up, their debt payments would have increased as well (US loans comprise 63% of funds loaned through the World Bank & IMF). For the first time in history, the Federal Reserve publically stated that one of their decisions was affected by another country’s financial actions; illustrating yet another “this has never happened before” in 2015. Congress is becoming increasingly concerned about whether the Fed is helping or hurting and there are increased calls for more scrutiny and transparency. Rep. Bill Huizenga has introduced a bill to help achieve that goal which Fed Chair Janet Yellen opposes. The WSJ does a great job of synopsizing the current view of the Fed Reserve in their article “A Fine Fed Mess.”
Treasuries Rally Dollar Falls as Fed Stands Pat Stocks Slide (9-17-15)
Fed Leave Rates Unchanged (9-17-15)
Yellen’s Decision to Delay Fed Liftoff Points to Global Risks (9-17-15)
It’s a New World How China Growth Concerns Kept the Fed on Hold (9-17-15)
Chairman Huizenga Pushes for the Fed to Adopt a Rules-Based Approach (7-17-15) https://www.youtube.com/watch?v=cD3BrHbsBkw&feature=youtu.be
Huizenga Questions Chair Yellen Over Fed Independence (2-25-15) https://www.youtube.com/watch?v=I-VNn8xGqsQ
A Fine Fed Mess (8-21-15) WSJ | http://www.wsj.com/articles/a-fine-fed-mess-1440197469
In the week following China’s devaluation, US markets fell almost 2000 points, wiping out $5 trillion of value from the nation’s stocks. Although it has gained some back, on Friday the Dow closed at 16,384, almost 200 points below its close of 16,576 on Dec 31, 2013, wiping out all the gains for both 2014 and 2015. Typically, in a time of unrest the USD goes up against all the other currencies, however, the USD fell to both the British Pound and Euro. Apparently investors have more confidence in the GBP and the Euro than the USD, and Bloomberg analysts once again said, “this has never happened before.”
Another Bloomberg article (below) said, “Mom and pop are running for the hills. Since July, American households — which account for almost all mutual fund investors — have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals.”
While the US worries about losing its world reserve currency status, Texas has apparently planned well and is handling the economic downturns better than the rest of the US, even though a large part of its economy is oil. Texas still has a surplus, is the 16 largest economy in the world, the number one job producing state, has its own electrical grid system and has just established the only gold backed bank in the US. Maybe the US should take lessons from Texas.
It’s a New World How China Growth Concerns Kept the Fed on Hold (9-17-15)
Dollar Retreats with Treasuries, Yen as Shanghai Stocks Rebound (9-8-15)
Are Global Markets in a Currency War? (8-28-15) Bloomberg Video
Fed Up Investors Yank Cash From Almost Everything Just Like 2008 (8-28-15)
Dollar Drops to 7-Month Low Versus Euro Amid Global Stock Plunge (8-24-15)
John Kerry: If Congress Rejects Iran Deal, U.S. Dollar Could Lose World Reserve Status (8.11.15) http://www.realclearpolitics.com/video/2015/08/11/kerry_if_congress_rejects_iran_deal_us_dollar_could_lose_world_reserve_status.html#ooid=FwaHZ4djrpQyxOP-HW45kvlLwG-SOR7J
No Economic Mess in Texas (7-20-15) WSJ http://www.wsj.com/articles/no-economic-mess-in-texas-1437433836
Texas Launches Gold-backed Bank, Challenging Federal Reserve (7-15-15)
“Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.” – Bloomberg
“This is about the deceleration of the demand … The oversupply is prevalent, and will continue to be the theme over the next several quarters,” Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey, which oversees about $170 billion, said in a telephone interview.
Historically, a drop in commodities usually precipitates a drop in the stock and bond markets. This is what happened in 2008 and since we are following the same course as we did then, it is not surprising that the commodities are where they are. Countries which have accumulated massive debt and who have devalued their currency by printing money will continue to fall against countries that have not devalued their currency and created massive deficits. Deflation is a part of the commodity glut and drop in commodity prices, but as soon as inventories are full, those commodity industries will lay-off their workers, prices will rise and the inflationary spiral will begin. This drop is being further aggravated by overleverage and associated overcapacity.
Emerging Markets Are Not Facing a 1997-Style Crisis They’re Facing Something Worse (9-17-15) www.bloomberg.com/news/articles/2015-09-16/macquarie-emerging-markets-are-not-facing-a-1997-style-crisis-they-re-facing-something-worse
Commodities Are Crashing Like It’s 2008 All Over Again (8-5-15)
Commodity Collapse isn’t Slowing Down Amid Worst Week Of 2015 (7-25-15) Bloomberg
Commodities Slide Deeper Into a Rut (7-31-15) WSJ http://www.wsj.com/articles/commodities-slide-deeper-into-a-rut-1438384800
Low oil prices are expected to persist, especially with the ending of economic sanctions against Iran and their adding to the current oil glut. Congress has been attempting to lift the 1973 ban on the sale of crude/unrefined oil so US oil producers could sell to the rest of the world as well. We have almost run out of places to store what we have, and if we do, our oil industry would essentially shut down. Close to 96,000 oil industry workers have already been laid off. President Barack Obama opposes a measure poised to advance in the House of Representatives this week that would end the four-decade U.S. ban on oil exports. Initially he supported ending the ban, but that was before the proposed Iran Treaty. On SundayOPEC called for an increase to $80 per barrel next year, but current global economic pressures and national self-interest may cause many oil producing nations to ignore OPEC. This may be especially true since OPEC has ignored them in favor of their own self-interest and political goals.
Defaults Mount in Beleaguered Energy Industry (9-17-15) WSJ
Obama Opposes Bill to Lift Oil Export Ban Set for House Vote (9-15-15) Bloomberg Video
Oil Speculators Most Bullish in Two Months as OPEC Calls for $80 (9-20-15) Dan Murtaugh
As the fiscal year ends on September 30th, for nations, the only thing that remains certain is uncertainty. The AIIB new world bank is moving forward with twenty more nations waiting to join and ramping up to begin loaning money. The US, German, Asian, and most world markets are all down. Beyond market concerns, the US/Iran treaty has relinquished oversight potentially allowing Iran to create a nuclear bomb; ISIS, Russia, Syria and other international military disputes, and the overwhelming refugee crisis in Europe are all creating unrest with no solution in sight.
Regardless of China’s agenda, its efforts have been less than fruitful and it cannot continue to manipulate its markets, as it’s too expensive and world markets have their own agendas. Most market analysts think a Fed interest rate hike makes no sense because there are no signs of inflation, our growth is barely holding its own and the devaluation of the Yuan has caused the USD to strengthen, as would a Fed interest rate hike. The stronger USD has made American exports more costly at a time when all the other major exporters are purposely devaluing their currency. No matter whether the Fed raises interest rates or not, I believe they will start printing money again in 2016. The Yuan devaluation has almost guaranteed that Japan and the ECB will expand their money printing; it’s only a matter of time before the US joins them.
Let me conclude with a warning from the Bank of International Settlements (BIS) taken from an article below: “The so-called central bank of central banks launched a scathing critique of global monetary policy in its annual report. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies. These low interest rates have in turn fueled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates. Monetary policymakers have run out of room to fight the next crisis with interest rates unable to go lower. The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crisis”.
Up to 20 Countries Waiting to Join China Led AIIB, President-Designate Says (9-18-15) WSJ
German Stocks Crush Dream of Central Bank Omnipotence (9-19-15) Wolf Richter
Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts (9-20-15)
The World Is Defenseless Against The Next Financial Crisis, Warns BIS (6-29-15)