Trade Tensions Are Brewing........

Juts what the doctor ordered...... As i´ve feared last week the "conditions" for world trade are not getting better...... Lets all hope that the tensions don´t escalate....... Just in China to request WTO consultations with US over tyre dispute - Commerce Ministry China says: - US tyre decision violates WTO rules. - Wants dialogue with US on tyre tariffs.Source: RTRS

Würde noch zum perfektem Sturm fehlen...... Wie bereits letzte Woche befürchtet verbessen die die "Rahmenbedingungen" für den immer noch in der Reha befindlichen Welthandel nicht wirklich. Die Spannungen zwischen einzelnen Ländern und der Ruf nach Protektionismus wird doch deutlich vernehmbarer. Bleibt nur zu hoffen das diese nicht wirklich eskalieren....... Update: China to request WTO consultations with US over tyre dispute - Commerce Ministry China says: - US tyre decision violates WTO rules. - Wants dialogue with US on tyre tariffs.Source: RTRS )

A Tale of Two Depressions VOX

The downward spiral in global trade volumes has abated, and the most recent month for which we have data (June) shows a modest uptick. Nonetheless, the collapse of global trade, even now, remains dramatic by the standards of the Great Depression.

Volume of world trade, now vs then

China Probes ‘Unfair Trade’ in U.S. Chicken and Auto Products

Sept. 14 (Bloomberg) -- China announced dumping and subsidy probes of chicken and auto products from the U.S., two days after President Barack Obama imposed tariffs on tires from the Asian nation.

Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.

Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank ( see end of the post for details )said last week.

The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.

China Reacts Quickly and Badly to Tire Tariffs Naked Capitalism

It would be better if we were not proven correct on this one, but when the US imposed stiff tariffs on imported tires from China late on Friday, we noted, “This could get interesting in a bad way.” The Chinese responded quickly over the weekend to announce they were investigating US auto parts and chicken, which together account for roughly as much as the disputed tires ($1.2 billion versus $1.3 billion for tires).

But protectionism is driven by the desire to protect jobs. Unemployment has not peaked in the US, and some analysts suggest that China’s job losses are far worse than the 20 million often bandied about, more on the order of 30 to 50 million. So political pressure is set to intensify.

The New York Times treats the Chinese reaction as a surprise. But the tire tariffs relied upon a special provision in the WTO agreement for China’s entry that set a lower bar for trade violations than the normal anti-dumping sort. This is the first time that rule has been used as the basis for an action against China, and China may feel it important to fight that precedent.

Obama Risks Global Trade War With Misguided Tariffs Mish

Not a single job will return to the US as a result of these tariffs. Imports from China will drop but imports from elsewhere will rise.Thus, the unfortunate tragedy in this mess is that Obama's kowtowing to the unions is going to cost union jobs. The ultimate irony is misguided unions are cheering every step of the way.To date, Obama is repeating the same mistakes Roosevelt and Hoover made during the Great Depression

Now, Obama's tire and steel tariffs will strongly encourage more unions and labor groups to seek relief under "Section 421" of U.S. trade law. That misguided law does not require petitioners to prove unfair trade practices.

If Obama keeps this foolishness up, which right now seems highly likely, he risks a global trade war similar to the global trade crash kicked off by the Smoot-Hawley Tariff Act signed by President Hoover in the early stages of Great Depression.

China Strikes Back on Trade WSJ

Citing a jump in Chinese imports, the Obama administration said Friday it would impose stiff tariffs on Chinese-made tires for the next three years, invoking a section of trade law that China agreed to as a condition for its joining the World Trade Organization in 2001. The move essentially would cut off the source of nearly 17% of all tires sold in the U.S. last year and hit cost-conscious consumers particularly hard, as retailers will have to find alternative sources for the lower-end tires that make up much of what China sends to the U.S.

Beijing responded quickly. Sunday, its Ministry of Commerce said it was starting antidumping procedures against U.S. exporters into China of chicken and auto products. It said it had received complaints from local producers that the U.S. products were being dumped in China at below-market prices. The ministry denied that the move, which could lead to sanctions, was protectionist.

Both chicken and auto products have been part of a battle between China and the U.S. in which both sides have already instituted trade-restricting measures. China has already effectively blocked U.S. exports of poultry products in retaliation for a similar U.S. block of Chinese poultry. And earlier this year, China raised tariffs on imported auto parts.

Foreign businesses operating in China have also argued that China is itself engaging in protectionism. The European Union Chamber of Commerce in China recently released a catalog of business complaints chronicling a deteriorating atmosphere for foreign enterprises operating in China. The country's recent stimulus package, for example, in some cases favored domestic manufacturers, the EU Chamber said.

Chinese President Hu Jintao is set to meet Mr. Obama this month at an economic summit in Pittsburgh. Mr. Obama is to visit China in mid-November.

Chinese officials "are definitely going to do something to express their dissatisfaction, but it won't be serious," Mr. Yan said. "The two sides need each other."

Michael Pettis / China Financial Markets

A few months ago I wrote about an HKMA paper that suggested that the implicit interest-rate subsidy to SOEs ( State Owned Enterprises)– not relative to the “right” interest rate in China (whatever that may be but which is certainly many percentage points higher than the official lending rates) but relative to the borrowing cost of large Chinese private corporations – accounted for 100% of SOE profitability. If China had reasonable interest rates, in other words, (and in fact there were negative real rates for much of the recent past), SOEs would on average be value destroyers.

Most of the press focus is on US-China disputes, and the truth is that these matter a lot because this is the most important trade relationship, but trade-surplus countries are in disputes almost everywhere. This, in my opinion, is only likely to continue. I suspect that we will make a concerted effort to coordinate the adjustment process only after things have gotten much worse for everybody.

>Here is the comment from the ECB.....

>Hier der oben angesprochene Kommentar der EZB......

Protektionismus : EZB sieht "Spirale der Vergeltung" FTD

The ECB is pointing to a study that after the G-20 Summit in November 2008 17 of the 20 states have been implementing protectionist measures.... This is in stark contrast to what they have promised ( my translation )

Sie verweist auf eine Studie, nach der nach dem G-20-Gipfel im November 2008 17 der 20 Staaten protektionistische Maßnahmen angekündigt hatten - obwohl sich die Staats- und Regierungschefs dort klar gegen jeden Protektionismus ausgesprochen hatten

Competitive Devaluation "Israel Edition"

With exports making up about 45% of the country's economy it is no wonder the Bank of Israel is intervening massively.....More countries will follow the Swiss, Israel & China......Will be interesting to see when Japan will voice "their concern" about the recent Yen strength.....This are not good news for global trade......I expect the € to be the main target of the intervetions.... More significant "headwinds" for European exporters.......

Da Exporte knapp 45% der Wirtschaftsleistung ausmachen ist es wenig verwunderlich das die Bank of Israel diesen für alle Tradingpartner ungünstigen Weg gewählt hat gegen den Shekel zu intervenieren......Denke das auf Sicht sich immer mehr Länder der Schweiz, Israel und China ( die USA kommen ja schon seit geraumer Zeit ohne Interventionen aus... ;-) anschließen werden.... Bin gespannt wann Japan in den Ring steigt und sein "Unbehagen" über die jüngste Yen Stärke zum Ausdruck bringt......Unschwer zu erkennsen das dies auf Dauer für den globalen Handel wenig förderlich ist..... Da der Großteil der Anpassungen zu Lasten des € geht sind das alles in allem keine guten Nachrichten für die europäischen Exporteure......


Israel's Fischer Wins Kudos for Central Bank Role Amid Crisis WSJ

From May 2008 through the end of last month, Mr. Fischer spent $28.4 billion, or about 14% of Israel's gross domestic product, buying foreign currency. While the central bank never said it was acting to weaken the Israeli shekel, the purchases did just that, helping to keep Israeli exports competitively priced.

> If you consider that since the intervetion the Shekel has devalued even against the Greenback you know how "succsessful" they have been.....You can watch the effects on the exchange rate here ( switch to the 1 year chart )

> Man muß eigentlich nur erwähnen das der Shekel seit der Intervention sogar gegenüber dem USD abgewertet hat..... Einen besseren "Erfolgsnachweis" kann es nicht geben......Den Effekt der Anwertung kann hier ( bitte die Jahrescharts Einstellung wählen ) "bewundert" werden

Update:

US Fires Opening Salvo In Trade Wars With China Mish

Trade Tensions With China Quietly Escalating Naked Capitalism

Protektionismus : EZB sieht "Spirale der Vergeltung" FTD

Sie verweist auf eine Studie, nach der nach dem G-20-Gipfel im November 2008 17 der 20 Staaten protektionistische Maßnahmen angekündigt hatten - obwohl sich die Staats- und Regierungschefs dort klar gegen jeden Protektionismus ausgesprochen hatten

The ECB is pointing to a study that after the G-20 Summit in November 2008 17 of the 20 states have been implementing protectionist measures.... This is in stark contrast to what they have promised ( my translation )

A Tale of Two Depressions VOX

The downward spiral in global trade volumes has abated, and the most recent month for which we have data (June) shows a modest uptick. Nonetheless, the collapse of global trade, even now, remains dramatic by the standards of the Great Depression.

Volume of world trade, now vs then

That´s What Is Happening When You Outbid A SWF......Hapag-Lloyd Said To Seek As Much As $2.4 Billion In Capital

No problem with overbidding NOL ( Temasek ) but when your consortium is in part backed by the taxpayer ( City Hamburg & HSH Nordbank ) it is getting "annoying"....Especially when the taxpayer had already to bail out HSH Nordbank with well over € 10 billion ( and counting / see States agree €13bn HSH bail-out ).... Will be interesting to see how long the public will tolerate this form of "patriotism" or should i better say "protectionism"....

Maybe some of the officials were blinded with the success in former interventions (Beiersdorf/Procter&Gamble and Norddeutsche Affinerie/A-Tec).... France must be jealous.......... :-)

Grundsätzlich sind Übernahmen die massivst überbezahlt sind nicht weiter verwerflich...... Anders sieht es da aus wenn das Konsortium das den "Mondpreis" bezahlt hat zu nicht unwesentlichen Teilen der öffentlichen Hand ( Stadt Hamburg & HSH Nordbank ) zuzuordnen ist...... Ganz abgesehen davon das die HSH Nordbank bereits mit etlichen Mrd € ( siehe States agree €13bn HSH bail-out ) von den Steuerzahlern gestützt werden mußte....... Hier eine mehr als gelungene extra3 - Chronologie HSH Nordbank GENIAL :-)

Denke das diese Art des Patriotismus und der Standortpolitik ( evtl. sind die Erinnerungen an früher erfolgreich geschlagene "Schlachten" wie Beiersdorf/Procter&Gamble bzw. Norddeutsche Affinierie/A-Tec noch zu gut in Erinnerung) doch gewaltig aus dem Ruder gelaufen ist...... Böse Zungen könnten hier auch von Protektionismus sprechen...... Da könnte sogar Frankreich neidisch werden... :-)

Flashback October 2008

Rückblende Oktober 2008

TUI Sells Hapag-Lloyd Unit in 4.45 Billion-Euro Deal

Oct. 12 (Bloomberg) -- TUI AG, the German owner of Europe's largest travel company, agreed to sell Hapag-Lloyd to a Hamburg- based investor group in a deal that values the shipping company at 4.45 billion euros ($6 billion).

The Hamburg group, led by the city's government and logistics billionaire Klaus-Michael Kuehne, was the sole remaining bidder after Neptune Orient Lines Ltd. ( Temasek Holdings - the investment arm of the Singapore Government - is the largest single shareholder with a 68% holding ) dropped out on Oct. 10. TUI initiated the sale in March, giving in to investor pressure to focus on tourism.

The investor group, called Albert Ballin KG after a famous Hamburg ship owner, bid for the company to secure jobs and an important part of the city's maritime history. The group consists of the city of Hamburg (Hamburg alone has a holding of about 23 percent), Kuehne, private investment bank M.M. Warburg & Co., regional bank HSH Nordbank AG, and insurers Signal Iduna and Hanse Merkur.

Fast forward to today........

Nun zu der heutigen Schlagzeile.......

Hapag-Lloyd Said to Seek Up to $2.4 Billion Capital

July 9 (Bloomberg) -- Hapag-Lloyd AG, Germany’s largest container shipping line, is seeking as much as 1.75 billion euros ($2.4 billion) in capital from lenders and shareholders including TUI AG, two people familiar with the matter said

German banks will be asked to provide a 1 billion-euro loan backed by the federal government, one of the people said. TUI would shoulder 325 million euros and Albert Ballin 425 million euros, the person said. The Hamburg city, part of Albert Ballin, would pay 170 million euros, according to the person.

Doubling down.......Another interesting part is that TUI is still owning over 40 percent and has given Hapag-Lloyd significant credit lines.....The FTD has an estimate of only € 400 Million. According to Manager Magazin & TUI Deal Presentation ( Page 11) it is closer to € 1.4 Billion......

Hört sich für mich ganz nach "verbilligen" an......Interessant ist zudem das TUI immer noch über 40% an der Reederei hält und Hapag-Lloyd zudem nach der FDT mit 400 Mio € an Kreditlinien versorgt hat ( siehe auch Hapag-Lloyd braucht Milliardenhilfe ).Gemäß dem Manager Magazin ( siehe Hapag-Lloyd in schwerer See ) und der TUI Deal Präsentation ( Seite 11 ) vom Februar sind es sogar 1,4 Mrd €. Hier mehr vom Handelsblatt Notruf in stürmischer See

Needless to say that TUI is already rated at JUNK...... I´ll bet that they already regret that they haven´t sold to Temasek......

Brauche wohl nicht weiter erwähnen das TUI selbstredend seit Jahren mit JUNK geratet wird....... Bin mir sicher das die es bereits bitter bereuen nicht an Temasek verkauft zu haben.....

Corporate Rating

	Corporate Rating	Ausblick
Standard & Poor´s	B+	negativ
Moody´s	B2	negativ

Here is more on on the outlook for the shipping and container business...........

Hier mehr zum trüben Ausblick für die Containerbranche.........

Trade Update: Container Shipping "A Black Hole of Losses" Naked Capitalism

Cargo ships will carry 27 million fewer containers by year's end than they did in 2008 -- a reduction roughly equivalent to all of the cargo containers handled by the five busiest U.S. seaports in a typical year, according to London-based Drewry Shipping Consultants' Container Forecaster Report.

"There has never been a decline like this before. We have never seen numbers like these," said Neil Dekker, editor of the Drewry report. "The container industry is looking at a $20-billion black hole of losses. We can expect a lot of casualties."...

FT Alphaville

Market imbalances are in our view aggravated by the large newbuilding orderbook across most segments. These vessels will be delivered during difficult market conditions with most having been ordered at high rices. All shipping sectors will likely be affected by the high prices paid for newbuildings in recent years.

By our reckoning, these vessels will, on average, have to earn high freight rates to cover their purchase price and operating costs. With freight rates now very low in some segments, vessel operators look likely to incur substantial losses.

Consequently, we expect that the downturn for shipping will be severe and prolonged. We expect some relief on supply-side pressure, however, to come from widespread newbuilding cancellations or deferrals, and subsequent bankruptcies at weaker shipyards or cancellation of new ‘greenfield’ shipyard projects, primarily in China. We believe this is most likely to affect deliveries in 2011 and 2012

A sudden ratcheting upwards of the risk profile of these portfolios, which is what S&P expects, could mean a quadrupling in demand for regulatory capital under Basel II - quite a significant increase, particularly in these strained times.

The orderbook/current fleet ratio is indeed "stunning"......

Das Verhältnis Orderbuch im Verhältnis zur aktuellen Flotte ist in der Tat "atemberaubend"......



I´ll finish with one HSH Nordbank figure ......

Abschließend eine wenig beruhigende HSH Nordbank Zahl

Shipping lending represents 7.4x HSH Nordbank’s equity at end 2007

There is a good chance that large party of the shipping financing arm will be "outsorced" to a Bad Bank.....

Bin mir sicher das große Teile der Schiffsfinanzierungen demnächst in einer eigens dafür gegründeden Bad Bank landen werden.....

Protectionism On The Rise....."China Edition"

First the US and now China ( the country with the biggest surplusses ) ...... Just what the doctor ordered...... Now combine this with the following chart ( for more more "depressing" charts see A Tale of Two Depressions & World Trade Shrinks ) and we all can only hope that this kind of "cancer" isn´t spreading.... But i have some serious doubts.....

Nachdem die USA ja bereits trotz einmal mehr großer Worte von Obama die "Buy American" Klausel in Ihrem Konjunkturpaket haben festschreiben lassen kommt jetzt der nächste Tiefschlag...... Wenn die Weltkonjunktur eines nicht gebrauchen kann dann ist es eine Ausuferung des Protektionismus. Der Welthandel ist eh im freien Fall ( siehe klasse Chart via WSJ World Trade Shrinks )..... Das jetzt ausgerechnet China ( das Land mit den größten Handelsüberschüssen ) genau in diese Richtung marschiert ist mehr als bedenklich und läßt einem bei dem nachfolgenden Chart ( mehr depressive Charts via A Tale of Two Depressions ) noch pessimistischer in die Zukunft blicken.......

‘Buy China’ policy set to raise tensions FT

China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus programme in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms.

The government also said it was launching an investigation in response to complaints from domestic industry associations which accuse local governments of favouring foreign suppliers in procurement related to the country’s Rmb4,000bn ($585bn, €421bn, £356bn) economic stimulus package.

Just a few months ago Beijing was raging against a proposed “Buy American” clause included in the US economic rescue package.

“Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages,” Yao Jian, a Chinese commerce ministry spokesman, told reporters in February. “We express deep concern about these [measures] ... under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages.”

Most economists agree China’s economy is starting to recover as a result of its aggressive stimulus package but the country is still struggling with unemployment and fears widespread layoffs could lead to serious social unrest.

The edict was issued jointly by the legislative office of the State Council,China’s cabinet, the national development and reform commission (the country’s powerful state planning agency) and the ministries of industry and information, supervision, housing, transport, railways, water resources and commerce.

The new edict bans local governments and departments from discriminating against domestic suppliers in their procurement. Foreign companies operating in China argue that the opposite is in fact true and that they have been largely cut out of procurement related to the government’s stimulus package.

> More evidence via Michael Pettis that the potential for trade conflicts are rising......

> Hier ein anderes Beispiel das verdeutlich das sich Risiko von Handelskonflikten sich merklich erhöht hat.....

Trade tensions are not improving. Last week I had dinner with a very senior China manager at a large German company and he told me expected anti-dumping suits to surge in the first quarter of next year. As if to beat him to the punch yesterday’s Financial Times came up with this story (“China accused of predatory pricing practices”)

“We are puzzled by this discussion, especially since most European companies operating in China are locally incorporated and have not benefited directly from the government’s stimulus package,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China.

“Requiring government procurement to favour Chinese goods and services certainly won’t help to address China’s trade surplus of €170bn.”

UPDATE: Ambrose Evans-Pritchard

China risks trade suicide Beijing is playing with fire by issuing a `Buy China' edict for its stimulus package.

Beijing risks making the same catastrophic error as the US Congress when it passed the US Smoot-Hawley Tariff Act in 1930. America was then the rising surplus power, like China today. It was the chief beneficiary of an open global system.

By imposing tariffs, Washington triggered massive retaliation. While nobody escaped the Great Depression that ensued, the effects were unequal. The US suffered a far steeper decline in output than the rest of the world. Britain muddled through relatively well in a trade bloc behind Imperial Preference.

China’s action is extremely disturbing. It confirms what we have long feared, that the Chinese government is sufficiently worried about rising unemployment to adopt suicidal measures. Nor does this episode instill confidence in the `China recovery story’.

China kennt die Kraft der Illusion FTD

Das Land will nur noch chinesisch kaufen, frisiert volkswirtschaftliche Statistiken und hängt weiter vom Ausland ab. Ganz schön merikanisch geworden

Die bisher größte Verwunderung löste Peking mit dem für das vierte und das erste Quartal gemeldeten BIP-Wachstum aus - 6,8 und 6,1 Prozent im Jahresvergleich sollen es gewesen sein. Das erstaunt, wo doch die Stromproduktion seit dem vierten Quartal zwischen einem und zehn Prozent im Vergleich zum Vorjahr rückläufig war. In China entfallen 80 Prozent des Stromverbrauchs auf die Industrie.

Number Of The Day "Japan´s Export Plunge Record 27 Percent"

WOW! The strong Yen didn´t help......... I expect that the entire currency complex has the potential to become the next "battleground" ( hopefully not combined with "trade wars" see Has Beggar Thy Neighbor Started? via Naked Capitalism & The Major Risks for 2009: Tariffs, Wars, Currency, etc. from Merrill Lynch's David Rosenberg via Infectious Greed)........ The race to the bottom is already underway..... Let´s hope that we won´t see a crash of a major currency ( british Pound )...... At least there will be always a bull market ( one weak vs another less weak currency)..... Got Gold......?

Donnerwetter! Bleibt zu hoffen das wir als vergleichbare Exportnation etwas besser abschneiden...... Denke den Japanern wird gerade jetzt der erstarkte Yen nicht sonderlich gefallen..... Ich befürchte das uns das Thema Wechselkurse in den kommenden Jahren desöfteren heimsuchen wird ( hoffnetlich nicht auch in Form von "Handelskriegen" siehe auch Has Beggar Thy Neighbor Started? via Naked Capitalism & The Major Risks for 2009: Tariffs, Wars, Currency, etc. von Merrill Lynch's David Rosenberg via Infectious Greed)...... Der Versuch die Währung möglichst schwach zu halten ist weltweit bereits im vollen Gange. Ich würde mir nur wünschen das wir das ohne Kollaps eine der größeren Währungen überstehen. Denke da besonders an das britische Pfund...... Immerhin ermöglichen diese Märkte immer einen garantierten Bullenmarkt ( schwache vs einer wenigen schwachen Währung ) ...... Got GOLD?

Thanks to Bespoke

Japan Exports Plunge Record 27% as Recession Deepens Dec. 22 (Bloomberg) -- Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.

Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. That was more than the 22.3 percent decline estimated by economists and the sharpest since comparable data were made available in 1980.

Shipments to the U.S. slid an unprecedented 34 percent and sales to China slumped the most in 13 years

The government today lowered its assessment of the world’s second-largest economy, saying it’s “worsening” for the first time since 2002. Gross domestic product shrank in the past two quarters, sending Japan into its first recession since 2001.

Toyota, Honda Motor Co. and Sony Corp. are among the companies that are shedding thousands of workers and closing production lines as profits dwindle. Car exports slid 32 percent last month, the most ever, and semiconductors slumped 29 percent, the ministry said.

UPDATE : Toyota Forecasts First Operating Loss in 71 Years on Yen, Sales

Compounding the drop in demand is the stronger yen, which erodes overseas profits. Every 1 yen gain against the dollar and euro trims Toyota’s annual operating profit by 40 billion yen and 6 billion yen, according to the company. The carmaker in November based its second-half earnings outlook on 100 yen to the dollar and 130 yen to the euro.

Today’s report showed the global recession is spreading to the emerging markets that propped up exports as demand from the U.S. and Europe evaporated. Exports to Asia fell 27 percent, the most in 22 years. Shipments to China, Japan’s largest trading partner, tumbled 25 percent, the steepest decline since 1995.

Exports to Europe slid 31 percent, the second-most ever.

Emerging Markets Watch / PIMCO

the maybe most important question " can the rest of the world" and here especially the emerging markets compensate the us downturn. pimco has good answers. either way you look at things...ot doesn´t look good for the $!

die wohl zur zeit wichtigste frage " kann der rest der welt die schwächelnden usa ersetzen". hier geht insbesondere um die emerging markets. pimco hat ein paar gute antworten. wie man es auch dreht und wendet ...es sieht nicht gut für den us $ aus.

...On that drive home, it occurred to me that the recent bout of volatility in financial markets also produced a lot of finger pointing. Market pundits, looking for the cause of all this stress, were “wiggling” at Chinese equities, the U.S. sub-prime mortgage market, UK-Iran tensions, the hollowing out of the U.S. manufacturing sector and CDO unwinds. But in a “twist” from the financial crises markets have experienced over the past decade there was one notable absence from this list of usual suspects: Emerging Markets’ fixed-income products, both external debt and local markets. In fact, EM external debt assets, which have been some of the most volatile financial instruments in past periods of market stress, were among the least volatile financial assets globally in March (Chart 1). What explains this twist from the past? Let’s point our fingers at some key factors that have served to stabilize EM even as developed markets gyrate.

Engine Number Two
A long-standing question posed at PIMCO is whether a second engine of global growth can emerge to take the baton and keep the global economy running should the U.S. consumer falter. For years we have looked at the prospects for both Europe and Japan and found little compelling evidence to suggest a dependable second engine there. So too has the emerging world traditionally been considered 1) not large enough to significantly alter the global growth picture, and 2) heavily dependent on U.S. growth prospects as a driver of its own growth story. But as the U.S. growth picture started to deteriorate significantly in Q1 2007, a number of investment houses began to cut projections for 2007 U.S. real GDP growth to the 2% area,

while at the same time upgrading growth forecasts for China in 2007 to 10%, with risks to the forecast to the upside!

These projections are in line with the conclusions of PIMCO’s March Cyclical Forum where U.S. real GDP growth in 2007 was projected to come in below 2.25% and Chinese growth around 10%. Importantly, these projections are not independent of one another, as China is expected to grow at 10% even as the U.S. stumbles on the back of housing and other woes. Low levels of leverage at the government level, heavy government planning and intervention in the economy, and still significant infrastructure needs leave plenty of room for internal stimulus in China should slower U.S. growth projections materialize.

After four consecutive years of double-digit real GDP growth, this forecast for China has widespread ramifications for global growth and global financial markets. China is now the world’s 4th largest economy measured in nominal GDP terms, and is expected to overtake Germany as the 3rd largest within the next two years1. China is the number one importer of a host of agricultural and metals commodities (iron ore, aluminum ore, pulp and paper, soy beans, and cotton, to name a few) and it’s the world’s number three importer of oil (Chart 2).

Continued double-digit growth forecasts for China suggest commodities will remain relatively well supported, benefiting the commodity exporting economies. EM countries ran a $45 billion trade surplus with China in 2005, and are projected to run current account surpluses in aggregate for a 10th straight year in 20072. Hence, one reason for the lack of finger pointing at EM countries is that as China continues to grow, this source of demand for EM produced goods will continue to pull growth prospects for the rest of the emerging world along with it, U.S. slowdown or not.

External Debt: Here Today, Gone Tomorrow?
As EM external balance sheets continue to strengthen as links to China grow, pressure on EM currencies to appreciate relative to the U.S. dollar (USD) also grows. This pressure has been resisted in part through high degrees of FX currency intervention by EM central banks. And why not? A cheaper currency keeps EM exports competitive and at the same time the intervention has allowed many countries to build massive levels of international reserves that help signal to foreign pools of capital a level of financial stability previously unheard of in the EM universe. But when is enough, enough? Many EM countries are now showing signs of reaching bloated levels of USD reserves and are taking action to move away from the standard recycling of accumulated USD through the U.S. Treasury market. For some, like Russia, this takes the form of moving USD reserves to a basket including the EUR, GBP, Gold and JPY. For others, like China, this means setting up agencies to invest USD reserves more aggressively through strategic transactions (including targeting the acquisition of much needed natural resources) and broadening its investment universe to include a range of financial instruments outside of U.S. Treasuries http://tinyurl.com/3x6q7e .

And finally for others, like Brazil and Mexico, the approach involves aggressively buying back external debt to eliminate the negative carry and currency mismatch vulnerabilities associated with these issues3. In fact, Brazil released a statement last month detailing $700 million of external debt repurchases made in secondary market transactions in January and February of this year. Credit Suisse estimated that in 2006, EM countries net retired $8 billion of external debt, and PIMCO expects that trend to continue in 2007 and beyond (Chart 3). So, a second reason for the lack of finger pointing at EM is that large, non-commercial agents were buying on any dips in EM external debt, even as the rest of the world flailed away in March’s wave of volatility.

Whither the U.S. Dollar
Paradoxically, as EM countries seek to mitigate USD weakness and prevent currency strength with the actions described above, the feedback mechanism is one that translates into even less demand for USD and more demand for emerging markets currencies from market participants as historical risk premiums associated with investing locally in these countries fall rapidly. As cycles mature and the financial markets play a repeated game, many countries gradually acquiesce to stronger FX levels as positive externalities become more obvious. These include a dampening of inflation pressure, more room for central banks to cut rates (thereby lowering government funding costs), and greater purchasing power for the citizens that these governments represent. These dynamics have manifest themselves in the market as investors recognize the firepower (in the form of international reserves) emerging countries have to ensure that their financial systems are insured from shocks, thereby dampening incentives for speculators to apply market pressure to EM foreign exchange rates. Furthermore, dislocations in local markets are therefore increasingly viewed as buying opportunities, anchored by strong fundamentals and policy frameworks (such as inflation targeting, independent Central Banks, and pension reform) that mirror developed country aspirations. These endogenous dynamics, coupled with a shaky foundation for the USD (including U.S. characteristics such as twin deficits, slower growth, lower interest rates, and a slow erosion of Bretton Woods II as reserves are diversified) make moving exposure out of the USD and into EM local currency attractive and provide a third reason for the lack of finger pointing at EM during the recent bout of volatility in other assets4.

Protectionism to Distract but not Derail
Seems like a great story, and it has been for investors in the asset class with 3 year returns for external debt of 10.4%, 9.9% for EM currencies and 14.6% for the long-duration EM local markets5. However, as we head into the U.S. presidential election cycle of 2008, protectionist sentiment is on the rise. The U.S. Commerce Department’s decision to apply countervailing duties against a non-market economy (namely China) for the first time in twenty years potentially could be expanded well beyond the coated paper industry currently targeted. here the link http://tinyurl.com/2bf59a

.....Understandably, these proposals come as increasing low-cost competition from around the globe frustrates the American worker. But enacting these protectionist measures will only serve to 1) shrink the pie of global growth, 2) raise prices on goods that come from abroad, disproportionately hurting the lowest income sectors of the U.S. economy who have benefited most from inexpensive products at places like Wal-Mart, 3) further deteriorate the U.S.’ standing in the international community as a leader of promoting free trade, 4) risk pushing developing economies that are embracing capitalism and free market orientation down a different path, and 5) further cement regional ties that are forming in places like Asia to counter long-standing U.S. economic dominance.



Will this be enough to derail the secular maturation of the emerging markets and lead to a new bout of finger pointing? We don’t think so. First of all, many policymakers in the developed and developing world are committed to avoiding the protectionist outcome. The points outlined above are important reasons why the U.S. has not more aggressively pursued protectionism despite the resurgence of this issue during the election season. And developing countries have tried to keep temperatures low, as illustrated by the relatively muted response of China’s authorities to the coated paper decision. Second, as mentioned previously, emerging markets themselves are providing an increasing source of homegrown demand, as credit markets develop and large infrastructure projects proceed in countries like China. Finally, there are the range of other fundamental improvements in emerging markets, including ever-improving access to capital, strengthened institutional commitment to market-based economic reform, quickening speed of information and technology transfers across borders, and the growing global muscle of multinational corporations based in emerging markets. These factors should help ensure that EM growth remains on a positive trajectory.


Bottom Line
In sum, we see three reasons for the lack of finger pointing at EM during the recent bout of volatility. First, growth in China should be able to sustain EM growth even in the face of a U.S. slowdown. Second, external debt buybacks by EM countries mean there are large, non-commercial buyers on any dips in EM debt. And third, the increasing attractiveness of EM currencies provides a source of demand for EM local debt.

How to invest with these trends in mind? Diversify your portfolio away from the USD and stop thinking of investing in EM as an alternative asset, but rather as a part of your portfolio allocation that may provide the best opportunities ahead. ....

There may be some more “wiggling” to come in global financial markets, but don’t expect to see those fingers pointing at the emerging markets anytime soon.

> i think some of the forecasts are off the table if the us slumps into a severe recession. pimco is still predicting us gdp growth close to 2%.

> denke die se planspiele gelten nur solange wie die usa nicht in ne handfeste rezession rauschen. pimco rechnet selber mit 2% us wachstum.

read here more about pimcos asian outlook http://tinyurl.com/2b2gps