-- Posted Wednesday, 31 October 2012 | | Source: GoldSeek.com
Our
leaders want a weaker dollar and a stronger Chinese renminbi (RMB).
That’s our assessment based on recent comments by President Obama,
presidential hopeful Romney and Federal Reserve (Fed) Chair Bernanke. If
you join them in that call, OK, just be careful what you wish for, or
at least consider taking action to protect your portfolio.
In
the past few weeks, Bernanke has become ever more vocal in encouraging
emerging market countries to allow their currencies to appreciate
against the dollar; and Obama and Romney have both been advocating for a
weaker dollar versus specifically the Chinese RMB. In the recent
presidential debates Romney continued his call for declaring China a
currency manipulator, and Obama proudly stated that the RMB had
appreciated 11% against the dollar since he took office. It has actually
been about 9% according to the data we look at; nevertheless, the point
that both were clearly trying to make is that a weaker U.S. dollar is
in our economic best interests. Likewise, in an IMF speech
Bernanke essentially admitted that accommodative monetary policy in the
U.S. causes upward pressure on foreign exchange rates between emerging
market currencies and the dollar, and suggested that foreign central
banks allow that dollar depreciation to take hold, rather than intervene
to prevent it.
It
may be superficially plausible that RMB appreciation is the key to
alleviating our economic woes, by promoting exports and therefore jobs
in the U.S. However, while lowering one’s currency might give a boost to
corporate earnings for the next quarter (as foreign earnings are
translated into higher U.S. dollar gains), it is difficult to imagine
that the U.S. can truly compete on price – the day we export sneakers to
Vietnam will hopefully never come. An advanced economy, in our
assessment, must compete on value, not price. Without discussing the
merits of this argument in more detail, let’s look at the flip side of a
stronger RMB, which is a weaker dollar and potentially higher prices
for goods imported from China. Notice that there is a lot of table
pounding about China stealing manufacturing jobs, but no protest when it
comes to the low prices consumers enjoy as a result of China trade.
After all, not all Americans are producers of export goods, but
certainly all are consumers of goods in general, many of which are
imported from China and emerging Asia.
Even
if we accept the argument that a weaker dollar may be good for certain
sectors and perhaps for the U.S. economy at large, not all will benefit,
in particular, not retirees facing diminished purchasing power.
Retirees would not see the nominal wage increases that the active labor
force could expect to experience, meaning rising costs of living without
an offsetting rise in income, which may only be coming from a
fixed-income portfolio still earning zero interest as Bernanke has made
it clear that “policy accommodation will remain even as the economy
picks up.”
We
agree with our policy makers to the extent that the dollar may be
generally overvalued and many Asian currencies undervalued; and
therefore the path of least resistance may lead to Asian currencies
grinding higher across the board. The below chart illustrates this
trend. China’s appetite for currency appreciation against the dollar may
have a good deal to do with its currency’s relative strength or
weakness compared to its Asian neighbors, who are export competitors. As
these other Asian currencies appreciate they provide the RMB more room
to appreciate as well.
While
many Asian currencies may rise over the coming years, we think Asian
countries like China, that are moving up the value-added chain, are in a
better position to handle more rapid currency appreciation than others.
As production processes become more complex, it is harder for low-price
competitors to easily replicate that output. As such, higher
value-added products provide China’s exporters with greater pricing
power in the global market, limiting the need and effectiveness of a
cheap currency policy. Additionally, over the medium to longer term, as
the Chinese economy continues to grow and the middle class becomes
wealthier, domestic consumption will play a larger and larger role in
their GDP, and that shift away from economic reliance on the American
consumer will also diminish the need for an export oriented currency
policy. In fact, we believe a stronger RMB will be beneficial for the
Chinese consumer and help that transition along.
The
gradual shift towards greater domestic consumption is occurring in many
other Asian countries that have been following the export growth model
and, as Bernanke puts it, that “systematically resist currency
appreciation.” As we can see in the above chart many Asian currencies
haven’t been resisting appreciation as much as you might think, and this
gets to Obama’s point on the RMB appreciation since he took office.
From an investment standpoint, 9% in four years isn’t a bad return in
this environment; it would take over 78 years to reach that return
rolling 3-month T-bills at their current yield of 0.11%.
American
consumers (and Chinese exporters) have been subsidized by the
artificially weak Chinese currency, to the detriment of Chinese
consumers who have faced stunted purchasing power. However, we believe
this dynamic will continue to change and suggest that a stronger RMB is
very likely not only on Bernanke, Obama, and Romney’s wish list, but
increasingly in China’s own interest. That would mean the tables getting
turned on the American consumer.
By
the way, there is a good reason no President has called China a
currency manipulator. Once China is labeled a currency manipulator, it
sets in motion a process in which Congress takes up the matter. Without
going into detail, our recent Presidents have preferred to seize rather
than delegate power: by calling China a currency manipulator, the
President would essentially tell Congress to have a stab at the issue;
whereas the President has far more flexibility at the executive branch
in dealing with China without consulting with Congress. Once Congress
gets involved, the threat of a trade war does become more likely. Even
if Romney is correct that China may have more to lose in a trade war,
our analysis shows that the currency of a country with a trade deficit
may be under more strain in a trade war. That may well be what Romney
wants to achieve, but again, be careful what you wish for.
If
part of what investors consume is produced in another region, then
holding some local currency or local currency denominated assets may be
prudent. American consumers should ultimately not be concerned with the
number of dollars in the bank, but rather with what those dollars can
buy in terms of real goods and services. We suggest that Bernanke may be
the currency manipulator to be more afraid of, and moreover, that our
de-facto weak dollar policy may be reason to take the purchasing power
risk of the dollar into account.
Please register for our Webinar
on Thursday, November 8th, 2012, where we will dive into implications
of US policies on China and Asian currencies in more detail. Also sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.
No comments:
Post a Comment