Competitive Devaluations, Trade War Coming Next

This is dangerous. The entire world has decided to play the competitive devaluation game with their currencies. Next step, protectionism.

Great article in the Financial Times Alphaville section this morning.  Izabella Kaminska does a great job summing it up.  As her headline says, “The crisis is upon us.”  I suggest you read it.

Of course equity markets rallied. Markets will rally as long as the government buys it.

These currency wars are not just being waged by big players like China, US, Russia, Great Britain, Japan and the EU.   We had 25 interventions in one week.  From the FT on Sep 28, which seems like an eternity ago:

“Here, for a start, is our preliminary and very non-exhaustive list (in which we count de facto intervention, suspected intervention and talk of intervention — and include talk of quantitative easing among the latter):

And some more courtesy of Marc Ostwald at Monument Securities:

And also:

More importantly, inflation expectations among the US bond traders have begun to shift. If and when QE2 happens, it is likely to happen in the middle part of the yield curve. There has been high demand for 5 year notes. The spread between 10 and 30 years widened, again.

The next read on consumer expectations with regard to inflation is important. If consumers perceive inflation is just around the corner, they may begin to spend-hoarding assets. If the freezer is empty, it might be time to buy a side of beef and put it in there. It might be time to buy some clothes. Things are going to be more expensive in the future, so buy them today.

The only haven is hard assets, and probably not housing! Shifting dollars to other currencies will not necessarily save you, since the world is undergoing competitive devaluation. Then, once the carnival ends, you have to reverse your trade. While the ride is spinning, you are putting your faith in whatever government’s currency you trade dollars for that that individual government will make the correct decision. Never wise to lay your marbles in one government’s policy.

In today’s climate, the Aussie Dollar is just about at parity with the US dollar, and the Canadian Dollar is also close. Those are the two havens right now. What happens if the market turns and everyone wants off the ship? Guaranteed you won’t be first. With all the juice banks charge to get into and out of the trade, it might even turn out to be a loser for you! Right the market, wrong the logistics and operations.

Inevitably, what happens to governments in currency devaluations is they point fingers at their neighbors. Then the politicians rush to legislate, intending to save their own people from the big, bad country that devalued. This is exactly what happened during the Great Depression with United States’ Smoot-Hawley Tariff Act. Undercurrents of trade wars are happening again. The US House of Representatives passed an anti-China bill. Obama and his minions are talking Chinese currency. Right wingers are protesting the amount of American debt China holds. Japan is pointing fingers at Korea. China and Russia have put tariffs or bans on imports of different US goods. The US Congress refuses to pass a trade pact with Columbia. The cycle goes on and on. The sentiment, and the actions are headed the wrong direction.

Quantitative Ease, competitive currency devaluations, tariffs and import duties, bans are like riding that merry go round. It might be fun when it starts but eventually you realize that you are going nowhere.