The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.The bold letters were added by me. I find this statement profound. Zhou proposes a super-sovereign reserve currency managed by a global organization which could both create and control global liquidity. Zhou writes:
When a country’s currency is no longer used as the yardstick for global trade and as a benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.My interpretation is that Zhou (China) supports a global institution to manage the “one world currency”, and that international trade would be conducted in this currency. Commodities like oil and gold would be priced in the world currency. At the same time, each individual nation (or zone, as in Europe) would keep and maintain there existing currency and manage fiscal and monetary policy within their borders in order to keep their currency’s relationship with the one world currency at an optimal ratio reflecting existing economic conditions in that country. China is obviously concerned to find themselves the biggest holder of US Treasuries. China also holds the world’s biggest foreign exchange reserves. Watching the US Federal Reserve, the US banking system, and the near (actual?) fraudulent rating of sub-prime debt as “AAA” by the rating’s agencies Fitch, Moody’s, and S&P which is the root of the current crisis, who can blame China for trying to figure out a way to insure their US investments? As they watch Congress enact bailout packages for the ultra-rich who don’t need the bailouts, at the expense of the US middle-class tax-payers who DO need the bailouts, the Chinese must have lost all confidence in US policymakers’ ability to think logically and act in an economically prudent fashion. The Chinese know the result of continued massive US deficit spending will be a devaluation of the huge pile of US Treasuries they sit atop. They would probably begin a massive move out of US dollar denominated assets now if they thought they could do so without harming themselves. So, what better way to do so than to create a global currency, establish equilibrium, and then move out of the US dollar in a controlled and more leisurely pace? With the US dollar being the world’s reserve currency, such a move is not currently possible as the spotlight is too bright. However, with a global currency and separate exchange rates in Euros, Yen, Renminbi, and yes, US dollars, to the world currency, the Chinese investment in US dollars would be better insulated. They could also buy oil and gold in the world currency, whereas now these two commodities are traded (pegged) to the US dollar. Don’t expect the central bankers around the world to support such a world monetary authority in public. The timing is bad too - a world in financial crisis is probably not the time for such a fundamental change. Geithner and Bernanke have apparently flatly rejected the notion. Note that Geithner first appeared open to the idea, but when the US dollar weakened appreciably, he made a “clarification” of his position. Was such a slip intentional?
THE FOUR BAD BEARS, INCLUDING THE CURRENT ONE........
The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".The rally has taken the S&P up almost 25% from the low - but the market is still off 46% from the high.
Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.
Please note the major bear market rally in the 1930's before it came crashing down hard again. The current market has so many similarities of the 1930's.
See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".
The second graph is about a week old, but it still tells the tale.
These charts provide useful past history of market trends.
Source: David Bettencourt www.etfdailynews.comGET A FREE TREND ANALYSIS FOR ANY ETF HERE!
Markets rally for a month and everyone thinks the recession is over right? Jim Cramer I think not. Markets don't go straight up or down. This country has several obstacles to overcome before a thought of a bull market exists! Call me a perma bear but, we are no way clear of the events that will take place in this country for the next decade!
Market Mood Brightens, But Is This Rally for Real?Posted Apr 03, 2009 01:26pm EDT by Henry Blodget in Investing, Recession, Banking
Stable prices provide a sense of security. They help define a reliable social and political order. Like safe streets, clean drinking water, and dependable electricity, their importance is noticed only when they go missing. When they did just that in the 1970s, Americans were horrified. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste, and pizza. People couldn’t predict whether their wages would keep pace with prices. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans’ confidence in their future and their leaders. There were widespread consequences. Without double-digit inflation, Ronald Reagan almost certainly would not have been elected president in 1980; the conservative political movement that he inspired would have emerged later or, conceivably, not at all. High inflation incontestably destabilized the economy, leading to four recessions (those of 1969–70, 1973–75, 1980, and 1981–82) of growing severity. High inflation stunted the increase of living standards through lower productivity growth. High inflation caused the stock market to stagnate; the Dow Jones Industrial Average was no higher in 1982 than in 1965. And it led to a series of debt crises that afflicted American farmers, the U.S. savings and loan industry, and developing countries. Afterward, declining inflation—“disinflation”—led to lower interest rates, which led to higher stock prices and, much later, higher home prices. This disinflation promoted the last quarter century’s prosperity. In the two decades after 1982, the business cycle moderated so that the country suffered only two relatively mild recessions (those of 1990–91 and 2001), lasting a total of 16 months. Monthly unemployment peaked at 7.8 percent in June 1992. As stock and home values rose, Americans felt wealthier and borrowed more or spent more of their current incomes. A great shopping spree ensued, and the savings rate declined. Trade deficits—stimulated by Americans’ ravenous appetite for cars, computers, toys, and shoes—ballooned. At the same time, this prolonged prosperity helped spawn complacency and carelessness, which ultimately climaxed in a different sort of economic instability and the financial turmoil that assaulted the economy in 2007 and 2008. Who Was to Blame? Double-digit inflation was not an act of nature or a random accident. It was the federal government’s greatest domestic policy blunder since World War II, the perverse consequence of well-meaning economic policies, promoted by some of the nation’s most eminent academic economists. These policies promised to control the business cycle but ended up making it worse. The episode invites comparison with the war in Vietnam, the biggest foreign policy blunder in the post–World War II era. Both arose from good intentions: The one would preserve freedom; the other would expand prosperity. Both had intellectuals as advocates, whether economists or theorists of limited war. Both suffered from overreach and simplification; events on the ground constantly confounded expectations. But there is a big difference. One (Vietnam) occupies a huge space in historic memory. The other (inflation) does not. This inflation had no comparable precedent in American history. Sudden bursts of inflation had occurred before, almost always during wars when the government printed more money to pay for guns, soldiers, ships, and ammunition. What happened in the 1960s and ’70s was different. America’s most protracted peacetime inflation was the unintended side effect of policies designed to reduce unemployment and eliminate the business cycle. It was a product of the power of ideas. In the 1960s, academic economists argued—and political leaders accepted—that the economy could be kept permanently near “full employment” (initially defined as 4 percent unemployment). Booms and busts, recessions and depressions, had long been considered ugly and unavoidable aspects of industrial capitalism. But once people accepted the idea that the business cycle could be mastered, the self-restraint that had silently kept prices and wages in check gradually crumbled. New assumptions emerged. If government could prevent recessions, then companies could always count on strong demand for their products. All higher costs (including higher labor costs) could be recovered through higher prices. Similarly, if the economy was always near “full employment,” then workers could press for higher wages without facing job loss. If their current employers wouldn’t pay, someone else would. Government wouldn’t tolerate substantial unemployment; that was its promise. The result was a stubborn wage-price spiral. Wages chased prices, which chased wages. Inflation became self-fulfilling and entrenched. Everything rested on an illusion, the Phillips Curve: the notion that there was a fixed tradeoff between unemployment and inflation. If true, that meant a society could consciously decide how much of one or the other it wanted. If, say, 4 percent unemployment and 4 percent inflation seemed superior to 5 percent unemployment and 3 percent inflation, then we could choose the former. The trouble was that the tradeoff didn’t exist, except for brief periods. In an important 1968 paper, the economist Milton Friedman explained that, if government tried to hold unemployment below some “natural rate,” the result would simply be accelerating inflation. Another economist, Edmund Phelps of Columbia University, developed the concept almost simultaneously. By their logic, governmental efforts to push unemployment down to unrealistic levels were doomed to failure. What would actually happen in the 1970s—the constant acceleration of inflation—was foretold by Friedman and Phelps. But good ideas could not spontaneously displace the bad until actual experience demonstrated the differences, especially because the bad ideas were more politically attractive. For inflation to be reversed, the underlying politics and psychology had to change. Americans detested inflation. We seemed to have lost control, both as individuals and as a society, over our fate. Since 1935, the Gallup Poll has regularly asked respondents, “What do you think is the most important problem facing the country today?” In the nine years from 1973 to 1981, “the high cost of living” ranked No. 1 every year. In some surveys, an astounding 70 percent of the respondents cited it as the major problem. In 1971 it was second behind Vietnam; in 1972 it faded only because wage and price controls artificially and temporarily kept prices in check. In 1982 and 1983, it was second behind unemployment (and not coincidentally: the high joblessness stemmed from a savage recession caused by inflation). Among government officials, there was a widespread fatalism about continued inflation. President Carter often seemed forlorn at the prospect. Early in 1980, he was asked at a press conference what he planned to do about the problem. He replied, “It would be misleading for me to tell any of you that there is a solution to it.” His resignation was common. Inflation had so insinuated itself into the fabric of everyday life, the thinking went, that it could not be easily extracted. The standard remedy would be a horrific recession, or a depression, that would reduce wage and price increases. Inflation was rationalized as a reflection of the deeper ills of American society. It was not a cause of our problems; it was a consequence of our condition. Specifically, it was said to show that the nation was becoming ungovernable. Americans had more wants (for higher pay, more government programs, a cleaner environment) than could be met. When Ronald Reagan won in a near landslide—50.7 percent of the popular vote against Carter’s 41 percent—inflation was the dominating concern. Voters didn’t know that Reagan could control it; but they did know that Carter couldn’t. Later, Carter himself judged that inflation had been the decisive issue against him, more important than his mishandling of the Iranian hostage crisis. Exit polls showed that 47 percent of Reagan’s voters rated “controlling inflation” as the most important issue, followed closely by 45 percent who valued “strengthening America’s position in the world.” In the Gallup Poll in September, 58 percent rated inflation as the No. 1 problem. How Inflation Was Subdued The subjugation of inflation was principally the accomplishment of two men: Paul Volcker and Ronald Reagan. If either had been absent, the story would have unfolded differently and, from our present perspective, less favorably. Reagan, president from 1981 to 1989, and Volcker, chairman of the Federal Reserve Board from 1979 to 1987, forged an accidental alliance that was largely unspoken, impersonal, and misunderstood. There was no particular personal chemistry between the men. Nor was there any explicit bargain—you do this, and I’ll do that. Although Reagan supported Volcker, many officials in his administration openly criticized him. Even while the alliance flourished, it sometimes seemed a mirage. But the alliance was genuine, a compact of conviction. Both men believed that high inflation was shredding the fabric of the economy and of American society. The country could not thrive if it persisted. Buttressed by these beliefs, they broke with the past. Each had a role to play, and each played it somewhat independently of the other. Volcker took a sledgehammer to inflationary expectations. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s. In December 1980, banks’ “prime rate” (the loan rate for the worthiest business borrowers) hit a record 21.5 percent. Mortgage and bond rates rose in concert. By the summer of 1981, consumers had trouble borrowing for homes and cars. Many companies couldn’t borrow for new investment. Industrial production dropped 12 percent from mid-1981 until late 1982. In many industries, declines were steeper. In autos, it was 34 percent (from June 1981 to January 1982), and in steel it was 56 percent (from August 1981 to December 1982). By 1982 the number of business failures had tripled from 1979. Construction starts of new homes in 1982 were 40 percent below the 1979 level. Worse, unemployment exploded. By late 1982, it was 10.8 percent, which remains a post–World War II record. It is doubtful that, aside from Reagan, any other potential president would have let the Fed proceed unchallenged. Certainly Carter wouldn’t have, had he been re-elected, nor would his chief Democratic rival, Sen. Edward M. Kennedy (D-Mass.). Both would have faced intense pressures from the party’s faithful, led by unionized workers—especially auto- and steelworkers—who were big victims of Volcker’s austerity. Nor is it likely that any of the major Republican presidential contenders in 1980 would have acquiesced, including George H.W. Bush, Howard Baker, and John Connally. Reagan’s initial economic program promised to reduce the money supply to curb inflation. He was the first president to make that part of his agenda, and he never retreated from it. As the economy deteriorated, he kept quiet. He refused to criticize Volcker publicly, to urge a lowering of interest rates, or to work behind the scenes to bring that about. When the president did speak, he supported Volcker. At a press conference on February 18, 1982—with unemployment near 9 percent—Reagan called inflation “our No. 1 enemy” and referred to fears that “the Federal Reserve Board will revert to the inflationary monetary policies of the past.” The president pledged that this wouldn’t happen. “I have met with Chairman Volcker several times during the past year,” he said. “We met again earlier this week. I have confidence in the announced policies of the Federal Reserve.” Reagan’s patience enabled the Federal Reserve to maintain a punishing and increasingly unpopular policy long enough to alter inflationary psychology. There was an outpouring of bills and resolutions to impeach Volcker, roll back interest rates, or require the appointment of new Fed governors sympathetic to farmers, workers, consumers, and small businesses. Rep. Jack Kemp (D-N.Y.), a prominent Republican “supply-sider,” wanted Volcker to resign. In August 1982, Sen. Robert C. Byrd of West Virginia, the Democratic floor leader, introduced the Balanced Monetary Policy Act of 1982, which would have forced the Fed to reduce interest rates. Reagan’s popularity ratings collapsed. In May 1981, early in his presidency, Reagan’s approval had reached a high of 68 percent. By April 1982, it was 45 percent (46 percent disapproved); by January 1983, it was 35 percent, the low point (56 percent disapproved). As the economy sank, Reagan was advancing an economic program of across-the-board tax cuts, widely portrayed as favoring the rich, and spending cuts, widely portrayed as hurting the poor. He was portrayed as spearheading an economic assault against ordinary Americans. On inflation, Reagan was clear-eyed. “Unlike some of his predecessors, he had a strong visceral aversion to inflation,” Volcker later said. Reagan was “influenced by people like Milton Friedman and understood that inflation was always a monetary phenomenon,” that it was “too much money chasing too few goods,” said William Niskanen, a member of Reagan’s Council of Economic Advisers. “He was the first president who understood that.…He knew that controlling inflation by regulation [controls] was absurd.” Even now, the social costs of controlling inflation seem horrendous. Over a four-year period (1979–82), the U.S. economy’s output barely increased. It nudged ahead in the first two years and then fell back in the last two. Since 1950, there had been nothing like that. Unemployment peaked in 1982 near 11 percent—a figure that, a few years earlier, would have been widely judged inconceivable. Although lower inflation benefited most people, the casualties were numerous and broadly dispersed geographically and socially: small business owners, overextended farmers, industrial workers. The number of business failures in 1982 (24,908) was nearly 50 percent higher than in any other year since World War II, and it would double to 52,078 by 1984. From 1979 to 1983, farm income declined almost 50 percent. But against these heartbreaking costs, there were larger long-term gains. Once the recession lifted, the economy and productivity growth revived impressively. When Reagan left office, Americans still worried about inflation, but it no longer gripped them with fear. Inflation was one problem among many, not a scourge shredding the social fabric. The taming of inflation reinvigorated the economy as nothing else; the expansion lasted from early 1983 until the late summer of 1990. At the time, it was the second longest peacetime expansion in U.S. history. The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn’t control inflation was discredited. The notion that a little less unemployment could be exchanged for a little more inflation was discredited. In their place, a consensus slowly developed that “price stability”—a vague term that both Volcker and his successor, Alan Greenspan, defined as inflation so low that it barely affected people’s decisions—was desirable and would promote a more stable and productive economy. The Forgotten Crisis One of the dilemmas of a democratic society is how to take actions that, though immediately painful and unpopular, seem essential to the society’s long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims. This was so obvious that in the late 1970s a frontal assault on inflation seemed impossible. What Volcker and Reagan wrought now seems ancient history: an isolated episode with little relevance to our present condition. This is utterly wrong. For every nation, there are crucial demarcation points that fundamentally alter society. The greatest of these for the United States was the Civil War. The Great Depression and World War II created another massive chasm. In our era, the fall of double-digit inflation is one of those separation points, though on a smaller scale—a gorge, not a canyon. Something profound and pervasive occurred: what I call the restoration of capitalism. Much of what we now consider routine and normal originated in the tumultuous transition from high to low inflation. A majority of today’'Americans have never experienced double-digit inflation. In 2008 slightly more than 60 percent of today’s roughly 300 million Americans were born in 1962 or later, meaning that the oldest of them would have been only 17 or 18 when inflation peaked in 1979 and 1980. They were too young for it to have made much of an impression. Even for some of those who lived through it, the memory of inflation has faded. In a very superficial way, that provides a serviceable explanation for the way inflation’s memory has faded. But the same arithmetic applies to Vietnam—indeed more so, since it was an earlier event—and yet Vietnam retains a powerful grip on the national consciousness. Something else must be at work. Closer to the truth, I think, is a collective failure of communication and candor by the nation’s economists. At its base, double-digit inflation was their doing, a product of their bad ideas. There is now a widespread recognition of this, and although there are many technical studies of inflation and of the period of high inflation, there has not been much in the way of public apologies (from those who were complicit in the error) or reprimands (from those who were not, because they either dissented or were too young). There seems to be an unspoken pact of self-restraint to let bygones be bygones, perhaps out of collective embarrassment or a recognition that dwelling excessively on past failures might compromise economists’ prospects as government advisers and high-level appointees. Over the course of 2008, inflation has risen to the uncomfortable level of about 5 percent, driven largely by higher prices for oil and food emanating from international markets. Whether it will go higher or subside to the negligible range of zero to 2 percent (a level at which most economists believe prices changes are so slight that they barely affect most consumers or businesses) is impossible to say. What is less uncertain is the similarity between our present predicament and the situation that led to higher inflation in the 1960s and ’70s. Then, a little inflation seemed unthreatening; but a little led to a little more, and a little more led to a lot. Source: www.reason.com
WHETHER THE GROUP OF 20 ESTABLISHED A "new world order," as British Prime Minister Gordon Brown asserted Thursday at the end of the London meeting of world leaders, it clearly gave a boost to the emerging markets of the world.
The G20 approved a $1.1 trillion package designed to pull the global economy out of recession, with a $750 billion expansion in funding for the International Monetary Fund, $100 billion for the World Bank and $250 billion in trade financing through multilateral financial institutions. Of the $750 billion for the IMF, $250 billion represents the creation of $250 billion of Special Drawing Rights, which is roughly the equivalent of printing money globally.
Stock markets around the globe soared following the G20 agreements, with the Dow Jones Industrial Average adding another 200 points to close just below 8,000 for the first time in nearly two months. Assets that have benefited from investors' aversion from risk, such as Treasury securities and the Japanese yen, fell sharply. Meanwhile crude oil rebounded.
Emerging market countries figure to be the biggest winners from the G20's package, according to Citigroup economists Don Hanna and Jurgen Michaels. Support for multilateral financial institutions is especially helpful for emerging markets, they write in a research note. So, too, is the increase in SDRs, which they note can be drawn down without conditions.
Emerging markets responded with sharp gains. The iShares MSCI Emerging Market Index exchange-traded fund (ticker: EEM), a useful proxy for the sector, surged 5.4% Thursday, about twice the gain in the Dow. Since its low of early March, the emerging markets ETF has surged 35%.
But even before the G20's largesse, emerging markets looked to be a big beneficiary of the Federal Reserve's monetary expansion, according to MacroMavens' Stephanie Pomboy. Just as the Fed's liquidity pumping after the dot-com bubble burst created the housing bubble, the U.S. central bank's exertions would serve to lift emerging markets, she writes in a note to clients.
The surplus liquidity isn't likely to ignite an inflationary boom in the U.S. economy if consumers refuse to borrow and spend. But that liquidity has to go somewhere, and emerging markets look like the most likely destination, she reckons.
Emerging markets and commodities took the first hits in the credit implosion because they were viewed as warrants (long-term call options) on global growth. Could it be emerging markets are moving from warrants on global growth to drivers of growth?
Meantime, Ms. Pomboy points out that while emerging economies account for 43.7% of global output, they represent only 10.9% of global stock market capitalization. China by itself makes up 15% of the global economy but less than 2% of market cap while the U.S. provides 21% of output but 43.4% of market cap.
"With so much room to grow…and so much money to flow..might the Emerging Markets become the next bubble?" she asks rhetorically. "All the ingredients are there, the persuasive story line (from their savings to their demographics), the dearth of compelling investment alternatives and, of course, the Fed's flowing font of cheap capital."
Now that's being augmented by the gusher being provided by the G20. And with a simple way to play it such as EEM, plus any number of single-country ETFs (notably the popular iShares/Xinhua 25 , better known by its ticker, FXI), it's easy to see traders' flocking to emerging markets.
Why Oil ETFs Can Lose As Prices IncreaseBy Tom Lydon on April 2, 2009 | More Posts By Tom Lydon | Author's Website Understanding why the oil exchange traded fund (ETF) occasionally lags behind jumps in oil prices is a simple matter of knowing how it works. United States Oil (USO: 30.98 +2.40 +8.40%) is the largest ETF that tracks the commodity. It followed the 77% drop of crude prices between July and December. But Kevin Baker for TheStreet explains that although oil prices have risen 45% since the low in 2008, the ETF went down another 4.3%. What’s happening highlights the challenges that ETFs trading futures encounter. During bullish times, when the price of oil is expected to rise, funds can end up paying contract prices that are higher than spot prices, a situation called “contango.” Each time an oil ETF rolls contracts forward a month during periods of contango its return is eroded. USO holds long positions on oil futures, rolling them forward each month. Three factors impact the ETF:
- Changes in the spot price
- Interest income on uninvested cash
- The roll yield
- United States Oil (USO): down 12.4% year-to-date; up 7.8% for one month
U.S. Preview: Job Losses in U.S. Nonfarm Report Could Be Far Worse Than Expected (Repeat)
The rally was further supported by the G-20 Summit, where leaders of the global powerhouses neared an agreement on the global recession through tightening rules on financial markets, cracking down on tax havens and channeling more cash to the International Monetary Fund. In fact, the G-20 leaders have decided to pump $1.1 trillion in international aid into the global markets to cushion the global recession’s blow, state Tony Czuczka and Edwin Chen for Bloomberg.
The effects of the recession have been further supported by the rise in consumer loan delinquencies. Mounting job losses have forced the delinquency rates across multiple types of closed-end consumer loans to jump to 3.2%, states the Stephen Bernanrd of the Associated Press. What’s shocking is that these delinquency rates do not take into consideration credit cards, which, for some, is a way of life. If one includes credit card delinquencies, this percentage will absolutely increase.
Many believe that the reason consumer loan delinquencies continue to rise is the increase in jobless claims, and there doesn’t seem to be any relief in this department. New claims for unemployment benefits jumped to a 26-year high and jobless claims increased to a whopping 669,000, last week, the highest jump since 1982, states the Labor Department. Although these numbers are devastating, they seem to have no immediate effect on the markets and their rally.
Crude oil seems to have jumped on the wagon and is riding the wave of the global market rally. A combination of surging markets in Asia and Europe and hopes of an economic recovery in the United States sent black gold north of $5 a barrel in intraday trading. PowerShares DB Oil (DBO), was up 6.8% in intraday trading and 0.1% year to date.
It seems that no amount of bad news can throw the markets off of their high horse. Supplier of herbicides and genetically engineered seeds, Monsanto (MON), increased revenues by 8.3%, but saw a drop in profits by 3.3%. These numbers still beat analysts’ expectations, sending shares of the seed maker’s stock in the green during morning trading, states The Wall Street Journal.
- Market Vectors Agribusiness ETF (MOO): up 3.2% in intraday trading and 4.5% year-to-date; MON is 8.4%
The Dow Jones Industrial Average soared 3.6% sending it north of 8,000 midday, the S&P 500 jumped 3.2% and the Nasdaq gained 3.8% in morning trading.Kevin Grewal contributed to this article. Source: www.etftrends.com