A very good article about Plaza Accord 2.0# Stock
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Guest Post: Plaza Accord 2.0: Is it Coming? Is it Here?
October 15th, 2010 by Michael Krieger
If we desire respect for the law, we must first make the law respectable.
The greatest dangers to liberty lurk in insidious encroachment by men of
zeal, well-meaning but without understanding.
Experience teaches us to be most on our guard to protect liberty when the
government’s purposes are beneficent.
Fear of serious injury alone cannot justify oppression of free speech and
assembly. Men feared witches and burnt women. It is the function of speech
to free men from the bondage of irrational fears.
- Quotes by former Supreme Court Justice Louis Brandeis
Is Plaza Accord 2.0 Coming?
On the fringes of the typical daily news blitz in which I fully immerse
myself, I have noticed heightened chatter about this concept that we may be
on the cusp of some sort of “Plaza Accord 2.0” type agreement between
governments and central banks globally. I feel the need to address this
because I do indeed think that some sort of informal or unspoken agreement
of this nature may already have been agreed upon behind the scenes. First,
just a quick recap on the first Plaza Accord.
The Plaza Accord was signed on September 22, 1985 and it consisted of an
agreement between the major Western economic powers at the time (including
Japan) to devalue the U.S. dollar relative to the Japanese yen and the
German Deutsche Mark. The trade backdrop was similar in many ways to today.
According to Bloomberg the current account deficit as a percentage of GDP
in September 1985 was -2.59% and today it is -2.96%. While many have
pointed out the similarities, I want to make it very clear that I believe
the structural, social and political environment in the United States right
now is multiples worse of what it was back then. One statistic that I think
is worth mentioning is the budget deficit as a percentage of GDP. The
latest available data here is for June 2010 when it stood at a banana
republic -9.1%. In September 1985 it was -5.0%.
So what would a modern version of the Plaza Accord look like. I have been
writing for several years now and since before the economic crisis that a
major dollar devaluation, while not a good thing for the country, had become
inevitable. The debt and spending that has been piled on since the crisis
to “avoid another Great Depression” (give me a break we are in it) has
only compounded the situation and makes an even larger devaluation a
certainty. The reason why I think the chatter of a Plaza 2.0 is so
compelling right now is because we have only two choices left. We can
devalue in a disorderly and completely chaotic fashion, or we can agree to
do it in a more measured and sane manner. A massive QE2 program would be
the chaotic choice and would lead to total and complete monetary and
economic destruction throughout the world. This is what people have been
referring to as the currency wars. I actually think that Bernanke’s threat
to QE2 to infinity has scared some of the emerging market leaders and
central bankers straight; as it should. At this point it is in everyone’s
best interest to come together and say ok, the dollar needs to be devalued
but it needs to be devalued versus all major currencies more or less
simultaneously. The truth of the matter is this. With commodities surging
and the CRB RIND Index (the spot price for 22 sensitive basic commodities)
at an all time high, the booming economies in Asia and elsewhere in the
emerging world are experiencing horrific inflation that is much worse than
the official statistics demonstrate and this creates an environment where
currency appreciation is a necessary tool to keep prices under control. The
BIG problem here is that they are wary to allow significant strengthening
as long as the yuan remains static. No one wants to devalue while China
sits there and does nothing. On the other hand, I believe they would all be
very willing and content to allow a major appreciation versus the dollar if
China comes along for the ride.
This is where a new Plaza-type agreement comes in. If all countries can
decide it is in their best interest to collectively allow market
appreciation for their currencies versus the dollar then everyone can
probably live with that. It is certainly better than an all out currency
war where each Central Banker yells my printing press is bigger than your
printing press. Listen, no one’s printing press is bigger than Banana Ben
Bernanke’s and I think the world is starting to figure that out. This
brings me to an even more interesting point. Has the G20 already agreed to
such an arrangement informally? While the financial press was abuzz with
articles that nothing came of recent meetings, can we believe this at face
value? Look at various currencies versus the dollar. In the OECD, look at
the yen, the Swiss franc, and even the euro for crying out loud. In Asia,
look at the Thai bhat, the Indian rupee, the Korean won. Look a the
Singapore dollar last night!!! Even the yuan is moving and appreciated by 0
.20% versus the dollar overnight. See the yuan/dollar chart below.
One Year Yuan Chart
So What Does this Mean?
I am about to do something that I never myself expected to do. I am going
to give Bernanke the benefit of the doubt on the recent QE2 chatter. What
if it was all just a threat to other nations to act on their currencies?
What if he was merely bluffing to blast the dollar into oblivion in an
attempt to get other central banks around the world to give in to the
concept of dollar devaluation? At the end of the day, this was probably not
his intent because all the evidence shows that the Federal Reserve have no
comprehension of how markets really work and how their participants really
think. Nevertheless, whether it was his intention or not is irrelevant.
The endless chatter of QE2 did indeed send a shiver down the spines of the
rest of the world and their currencies have been appreciating consistently
as of late. This brings me to two important points that I think the market
has failed to appreciate.
The first is that the Fed may be likely to do LESS not more at its November
3rd meeting. An announcement of $500 billion let’s say in QE2 at this
stage in my opinion is the equivalent of no QE2. Furthermore, I have
noticed that my general fears on Zimbabwe, fiat money, hyperinflation which
I have been harping on for the last two years has gone mainstream. The
conclusions do not seem to be particularly thoughtful however. The markets
are rallying as if the dollar will be totally destroyed in the near-term and
I don’t believe this will happen because the world has too much to lose.
Rather there may be a somewhat orderly but significant broad-based dollar
devaluation. There is this notion in the markets that this is good for
equities in general. I disagree completely. Take a step back and think of
the U.S. economy for a second. The economy is still dominated by consumer
spending and a financial system that survives on creating ponzi schemes that
investors buy in search for “yield.” This then takes me to the two
sectors I think have the most to lose in the scenario we are entering.
Financial services (especially the bailed out TBTF guys) and retail. As the
dollar is devalued and imported goods become prohibitively expensive due to
the direct currency effect as well as the costs to ship things (fuel anyone
?) we will source more of our consumption locally as well as the input costs
. Capital will allocate in a more efficient manner to manufacturing and
away from ponzi finance creations. Financial services has had a great run
in dominating the U.S. and this was unfortunately extended thanks to cronies
like Hank Paulson but the gig is up. Then there is retail. You have got
to be kidding me on this sector. Again, retail has benefited from a
business model where they outsource cheaply from abroad and sell to a
consumer that spent beyond its means. None of this works in a dollar
devaluation scenario. People are buying into this sector because of some
LBOs and a vocal hedge fund manager taking stakes in companies. Give me a
break.
So this brings me to the conclusion of this piece. I believe the equity
markets are pricing in near-term QE to infinity and I do not think this will
necessarily happen. Even if it did, I am not convinced stocks broadly
would go up on this. My major advice to anyone managing money is to dump
the loser sectors like financials and retail and move into sectors where the
secular growth will be in a dollar devaluation scenario. For me, that is
primarily in companies that produce globally traded commodities. I continue
to think increased relative exposure to oil, agriculture and precious
metals are the most attractive areas. Later on, manufacturing will join
this list. I believe the best way to play any potential market sell-off is
to bet against the financial and retail sectors specifically. While many
will call the world we are entering de-coupling again, it’s really more
like de-valuation.
All the best,
Mike
October 15th, 2010 by Michael Krieger
If we desire respect for the law, we must first make the law respectable.
The greatest dangers to liberty lurk in insidious encroachment by men of
zeal, well-meaning but without understanding.
Experience teaches us to be most on our guard to protect liberty when the
government’s purposes are beneficent.
Fear of serious injury alone cannot justify oppression of free speech and
assembly. Men feared witches and burnt women. It is the function of speech
to free men from the bondage of irrational fears.
- Quotes by former Supreme Court Justice Louis Brandeis
Is Plaza Accord 2.0 Coming?
On the fringes of the typical daily news blitz in which I fully immerse
myself, I have noticed heightened chatter about this concept that we may be
on the cusp of some sort of “Plaza Accord 2.0” type agreement between
governments and central banks globally. I feel the need to address this
because I do indeed think that some sort of informal or unspoken agreement
of this nature may already have been agreed upon behind the scenes. First,
just a quick recap on the first Plaza Accord.
The Plaza Accord was signed on September 22, 1985 and it consisted of an
agreement between the major Western economic powers at the time (including
Japan) to devalue the U.S. dollar relative to the Japanese yen and the
German Deutsche Mark. The trade backdrop was similar in many ways to today.
According to Bloomberg the current account deficit as a percentage of GDP
in September 1985 was -2.59% and today it is -2.96%. While many have
pointed out the similarities, I want to make it very clear that I believe
the structural, social and political environment in the United States right
now is multiples worse of what it was back then. One statistic that I think
is worth mentioning is the budget deficit as a percentage of GDP. The
latest available data here is for June 2010 when it stood at a banana
republic -9.1%. In September 1985 it was -5.0%.
So what would a modern version of the Plaza Accord look like. I have been
writing for several years now and since before the economic crisis that a
major dollar devaluation, while not a good thing for the country, had become
inevitable. The debt and spending that has been piled on since the crisis
to “avoid another Great Depression” (give me a break we are in it) has
only compounded the situation and makes an even larger devaluation a
certainty. The reason why I think the chatter of a Plaza 2.0 is so
compelling right now is because we have only two choices left. We can
devalue in a disorderly and completely chaotic fashion, or we can agree to
do it in a more measured and sane manner. A massive QE2 program would be
the chaotic choice and would lead to total and complete monetary and
economic destruction throughout the world. This is what people have been
referring to as the currency wars. I actually think that Bernanke’s threat
to QE2 to infinity has scared some of the emerging market leaders and
central bankers straight; as it should. At this point it is in everyone’s
best interest to come together and say ok, the dollar needs to be devalued
but it needs to be devalued versus all major currencies more or less
simultaneously. The truth of the matter is this. With commodities surging
and the CRB RIND Index (the spot price for 22 sensitive basic commodities)
at an all time high, the booming economies in Asia and elsewhere in the
emerging world are experiencing horrific inflation that is much worse than
the official statistics demonstrate and this creates an environment where
currency appreciation is a necessary tool to keep prices under control. The
BIG problem here is that they are wary to allow significant strengthening
as long as the yuan remains static. No one wants to devalue while China
sits there and does nothing. On the other hand, I believe they would all be
very willing and content to allow a major appreciation versus the dollar if
China comes along for the ride.
This is where a new Plaza-type agreement comes in. If all countries can
decide it is in their best interest to collectively allow market
appreciation for their currencies versus the dollar then everyone can
probably live with that. It is certainly better than an all out currency
war where each Central Banker yells my printing press is bigger than your
printing press. Listen, no one’s printing press is bigger than Banana Ben
Bernanke’s and I think the world is starting to figure that out. This
brings me to an even more interesting point. Has the G20 already agreed to
such an arrangement informally? While the financial press was abuzz with
articles that nothing came of recent meetings, can we believe this at face
value? Look at various currencies versus the dollar. In the OECD, look at
the yen, the Swiss franc, and even the euro for crying out loud. In Asia,
look at the Thai bhat, the Indian rupee, the Korean won. Look a the
Singapore dollar last night!!! Even the yuan is moving and appreciated by 0
.20% versus the dollar overnight. See the yuan/dollar chart below.
One Year Yuan Chart
So What Does this Mean?
I am about to do something that I never myself expected to do. I am going
to give Bernanke the benefit of the doubt on the recent QE2 chatter. What
if it was all just a threat to other nations to act on their currencies?
What if he was merely bluffing to blast the dollar into oblivion in an
attempt to get other central banks around the world to give in to the
concept of dollar devaluation? At the end of the day, this was probably not
his intent because all the evidence shows that the Federal Reserve have no
comprehension of how markets really work and how their participants really
think. Nevertheless, whether it was his intention or not is irrelevant.
The endless chatter of QE2 did indeed send a shiver down the spines of the
rest of the world and their currencies have been appreciating consistently
as of late. This brings me to two important points that I think the market
has failed to appreciate.
The first is that the Fed may be likely to do LESS not more at its November
3rd meeting. An announcement of $500 billion let’s say in QE2 at this
stage in my opinion is the equivalent of no QE2. Furthermore, I have
noticed that my general fears on Zimbabwe, fiat money, hyperinflation which
I have been harping on for the last two years has gone mainstream. The
conclusions do not seem to be particularly thoughtful however. The markets
are rallying as if the dollar will be totally destroyed in the near-term and
I don’t believe this will happen because the world has too much to lose.
Rather there may be a somewhat orderly but significant broad-based dollar
devaluation. There is this notion in the markets that this is good for
equities in general. I disagree completely. Take a step back and think of
the U.S. economy for a second. The economy is still dominated by consumer
spending and a financial system that survives on creating ponzi schemes that
investors buy in search for “yield.” This then takes me to the two
sectors I think have the most to lose in the scenario we are entering.
Financial services (especially the bailed out TBTF guys) and retail. As the
dollar is devalued and imported goods become prohibitively expensive due to
the direct currency effect as well as the costs to ship things (fuel anyone
?) we will source more of our consumption locally as well as the input costs
. Capital will allocate in a more efficient manner to manufacturing and
away from ponzi finance creations. Financial services has had a great run
in dominating the U.S. and this was unfortunately extended thanks to cronies
like Hank Paulson but the gig is up. Then there is retail. You have got
to be kidding me on this sector. Again, retail has benefited from a
business model where they outsource cheaply from abroad and sell to a
consumer that spent beyond its means. None of this works in a dollar
devaluation scenario. People are buying into this sector because of some
LBOs and a vocal hedge fund manager taking stakes in companies. Give me a
break.
So this brings me to the conclusion of this piece. I believe the equity
markets are pricing in near-term QE to infinity and I do not think this will
necessarily happen. Even if it did, I am not convinced stocks broadly
would go up on this. My major advice to anyone managing money is to dump
the loser sectors like financials and retail and move into sectors where the
secular growth will be in a dollar devaluation scenario. For me, that is
primarily in companies that produce globally traded commodities. I continue
to think increased relative exposure to oil, agriculture and precious
metals are the most attractive areas. Later on, manufacturing will join
this list. I believe the best way to play any potential market sell-off is
to bet against the financial and retail sectors specifically. While many
will call the world we are entering de-coupling again, it’s really more
like de-valuation.
All the best,
Mike