Sunday, 23 March 2014

Janet's Jackhammer

It's Sunday in Abu Dhabi and there's lots of noise coming from the construction site outside my hotel window (as there was for much of the night). I'm inclined to blame this on the Federal Reserve. This may same harsh but the UAE has pegged its exchange rate to the dollar (hence my tall latte this morning cost a mere £2.32, a mere 3% more than I paid last week in London). The other side of the competitive exchange rate however, is that monetary policy is too easy, asset prices rising and the Middle Eastern property boom is back  - hence the over-enthusiastic workers outside. Still, there's more chance that the hotel will change my room for one the other side of the building, than there is of the Fed tightening policy this year.

This tendency to see everything as being a result of Fed policy does have a serious side. In a world where the world's biggest economy has set the cost of money at a level that is utterly inconsistent with her own growth rate, let alone anyone else's (except perhaps the Eurozone's), asset prices rise to daft levels, irrespective of the 'fundamentals' of individual companies, or countries. Market analysis (particularly sell-side investment bank research) is reduced to guessing whether a particular share price is a 'dangerous bubble' or a 'justifiable boom', over-intrepreting every single utterance we get from the FOMC, and watching for random market-affecting events anywhere else in the world. Of course the 'exogenous shocks' from global political events then require London or New-York based analysts to sound like 'experts' in everything from Russian regional politics to Chinese currency policy.

Anyway, what we learnt about the world last week:

1) The Fed is not discouraged by winter weather-distorted data and will continue to pump money into the bond market at a slower and slower rate. Then, something like six months after they have finished buying bonds (which is an illustrative, not a literal six months) the Fed will start to raise rates, and the best guess of the committee is that they could be at about 1% rates by the end of 2015, maybe up close to 2 1/2% by the end of 2016, and perhaps just a little under 4% at some point in the dim and distant future, subject as usual to their changing their minds between now and then.

I am SO glad that's cleared up any uncertainty.

2) The Crimea became part of Russia, a bunch of names were put on a list, some more sanctions may or may not be imposed and in a wider sense, financial markets have not reacted very much. Europe is hurrying to wean itself off Russian gas according to the press, the leaders of several countries that used to be part of the USSR are very worried about what Mr Putin might do next, and, well, that's about it.

3) The Chinese renminbi has continued to weaken at a snail's pace and the subject is gradually attracting fewer headlines, though the publication later today of the first of the Chinese 'flash' PMIs will doubtless bring the issue top again. A tall latte in Beijing, I remind you, costs £2.63 and yet the consensus view amongst eco-people is that the currency will continue to appreciate in nominal as well as real terms from here. hey ho.

4) The UK had a 'Budget' and having spent years removing tax incentives to save for a private pension, the government has decided that in the future, pensioners won't have to buy annuities whose prices have been as distorted by Bank of England and Fed policy as any other asset. This has helped narrow the gap between Conservative and Labour parties in the polls, though it hasn't stopped the gap between 'yes' and  'no' closing in Scotland too.

We can now all move to on to analyse expertly the French local elections, before we get into the monthly PMI-fest tomorrow. Along with any random events about which people will have to become immediate experts. For myself I am gong to go on relying on Twitter to seek out and find me experts to explain the (very long) list of subjects about which I know almost nothing, while I try and work out whether the Fed's painfully slow pace of policy normalisation will strike fear into the hearts of the world's investors (somehow, I doubt it, but we'll see….). In the mean-time, I just need to get away from the noise of this Yellen-propelled jackhammer….

Sunday, 16 March 2014

Wandering around Asia - it's all about Chinese currency policy

I have spent a week in Asia, 40 hours flying to four countries in five days and have returned to find out that someone turned Winter off and Spring on instead. B&Q are likely to see barbecue sales go through the roof….

Singapore's economy is in full boom. As usual. There aren't enough workers in the country to fill the jobs available in bars, coffee shops or driving taxis. Reclaiming land from the sea just continues. The last time I was there, the Marina Bay Sands hotel ($3.5bn with a gigantic surf board on the top, a vast pool and a casino) was surrounded by building work. Now, it's surrounded by the Marina Bay Shoppes (sic). And a light show in the evening. A thriving economy has diversified into tourism and casinos, at pretty much exactly the same time as a newly-affluent Asian middle class took to the airways and started going on holiday. The post-2008 collapse in trade was followed a bounce pretty quickly,  Singapore's banks escaped relatively unscathed from the crisis and now it's all go.

The investor community in Singapore listen politely to views about Europe, the US and financial markets in general, but the conversation pretty quickly turned to the Renminbi.  Singapore is the private banking hub for Southern Asia, and benefiting from the combination of an ever-appreciating RMB and higher yields than are on offer in either US or Singapore dollars, is one the most popular investment strategies for their high net worth clients. The general view or hope of these investors is that the current PBoC-induced volatility in the USD/CNY rate is just a blip, which will not stand in the way of their investment strategy.

From Singapore to Seoul, a 5 1/2 hour overnight flight followed by a day of meetings. Really, I remember less of them than I should - I just wanted to sleep! I found a spa in the airport to shower, shave and try to calm my cold down in a sauna, then took the train into the city rather than a cab because it is so much cheaper. I've been visiting Seoul for over 20 years and it has transformed from 'developing' to 'developed' more impressively perhaps than any other city I visit. In the early 1990s it was full of identical black saloon cars and utilitarian-looking buildings. Not any more.  

Beijing, by contrast, has become a hard place to visit. I was lucky to have a day of clear skies and breathable air but the traffic is awful, cars nose to tail where not that many years ago bicycles outnumbered cars. Here, the conversations were about investment in Europe, with a fascination for Australia and Canada too, but when the talk turned to the domestic currency, I sensed nervousness and uncertainty. That is unusual in Beijing, a place where there is usually certainty about the authorities' goals and little doubt that they will be successfully achieved.

Hong Kong is an astonishing city. The drive in from the airport is a reminder that this is a major trade hub, as you pass container ship after container ship. More the  one person though, tells me that the luxury shopping brands and stores are doing less well now. The Chinese slowdown is being felt here. As for the clients, we were back to talking about China. I was asked how far I think the USD/CNY rate may rise and retorted that if the idea was to reduce the appeal of the 'carry trade', then what I learnt in Singapore is that those buying the Renminbi are not feeling dissuaded yet. The glib remark that from the current 6.15, we are more likely to see the rate at 7 than 5 in the coming years caused real concern until I qualified it by saying that neither of these levels is likely. What did I learn is that a 2 1/2% depreciation is causing more anguish than a fall that magnitude should. And by association that there is more leverage in the trade than I had realised. That increase in leverage makes me concerned, particularly in the wake of the announcement this weekend that the daily trading band for USD/CNY is being widened.

A note at the end. I've ben jotting down the price of a tall latte at Starbucks stores around the world for many years. This week, I paid SGD 5.60 (£ 2.66) , KRW 4400 (£2.47) , CNY 27(£ 2.64) and HKD 31 (£2.40), all of them more expensive that the £2.25  I get charged in london, the steady widening of the price differential between Beijing and Hong Kong perhaps the most striking feature.