The Group of 20 ended on Nov. 12, 2010 in South Korea culminated in a watered down statement without any meaningful agreement on rising global tensions over trade and currency issues.
This presentation outlines some of my observations regarding G20, U.S. dollar policy and investing strategy in this environment
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G20 & The U.S. Dollar Policy - A Presentation
1. G20 & The U.S. Dollar Policy
Dian L. Chu
Economic Forecasts & Opinions
Nov. 14, 2010
2. Highlights
2
Events Leading to G20 – Dagong, Greenspan & Geithner
G20 – A ColossalWaste of Time
Post G20 - TradeWar & ChinaYuan Policy
Bigger Problems at Home
The U.S. Dollar Policy & Investing Strategy
3. China’s Dagong Downgrades The U.S.
3
Nov. 9 - China’s Dagong Credit Rating Agency reduced U.S.
credit rating to A+, from AA, with Negative Outlook
Citing a “deteriorating intent” and ability to repay debt
obligations after QE2
Downgrade could be reflecting Beijing’s concern
Dagong’s Debt Progression Chart
With QE2, the U.S. has progressed into Stage 3 - Monetary Crisis
. Overall
Crisis
Monetary
Crisis
Economic
Crisis
Debt
Crisis
(U.S. )
4. Greenspan & Geithner Spar Over
Dollar
Nov. 10 - “America is also pursuing a policy of currency
weakening.” ~ Alan Greenspan, Financial Times
Nov. 11 - “We [the U.S.] will never seek to weaken our currency
as a tool to gain competitive advantage or to grow the economy.” ~
Timothy Geithner, CNBC
4
5. Highlights
5
Events Leading to G20 – Dagong, Greenspan & Geithner
G20 – A ColossalWaste ofTime
Post G20 - TradeWar & ChinaYuan Policy
Bigger Problems at Home
The U.S. Dollar Policy & Investing Strategy
6. The Great American Expectation Of G20
China to be condemned by the world for “Currency
Manipulation”
6
11. G20 on Currency & Protectionism
“Countries commit to moving toward more
market-determined exchange rate system… and
refraining from competitive devaluation of
currencies.”
“Countries will resist protectionism in all its
forms" and will "roll back” any new protectionist
measures.”
(Translation - Protectionism and “Currency
Weakening” is ok.)
11
12. G20 On Trade Imbalances
“The G20 will develop "indicative guidelines“..” to help identify
large trade imbalances…"
(Translation –There will be a “new index”, but trade imbalances are
ok.)
12
13. G20 on Capital Control
“Advanced economies…will be vigilant against excess
volatility and disorderly movements in exchange rates.
These actions will help mitigate the risk of excessive
volatility in capital flows facing some emerging
countries.“
(Translation - Emerging markets can protect themselves
from "hot money" by imposing capital flow controls, true
to the free market form.)
13
14. Highlights
14
Events Leading to G20 – Dagong, Greenspan & Geithner
G20 – A ColossalWaste of Time
Post G20 -TradeWar & ChinaYuan Policy
Bigger Problems at Home
The U.S. Dollar Policy & Investing Strategy
15. Trade War & China Yuan Policy
G20 outcome reflects a diminished leadership role of the U.S.
Yuan-Dollar peg will likely continue, but with a weak dollar, Beijing will have
room to guideYuan higher
China will likely implement more monetary tightening with growth the top
priority
TradeWar? The U.S. should not engage, as there are a lot bigger problems at
home
15
16. Highlights
16
Events Leading to G20 – Dagong, Greenspan & Geithner
G20 – A ColossalWaste of Time
Post G20 - TradeWar & ChinaYuan Policy
Bigger Problems at Home
The U.S. Dollar Policy & Investing Strategy
17. #1 - Spending & Debt
U.S. Gov. Debt to GDP Ratio
Ranks #3 Among G20,
Trailing Italy & Japan
17
19. #3 - Rebuilding Wealth & The Middle Class
The inflation-adjusted income
of the median household fell
4.8% between 2000 and 2009.
80% of population with only 7%
of financial wealth
Poverty rose to 14.3% in
2008—the highest since 1994,
with 43.6 million Americans
living below the official poverty
threshold
1 in 8 Americans is on Food
Stamps
19
20. #4 – Credit Not Reaching Private Sectors
20
Fed’s trillions from QE1 & QE2, and the perpetual near
zero interest rate is intended for banks to increase
lending and loosen credit conditions
However, lending to the private sector still falling off a
cliff
21. FACT - Banks DO NOT Make Money From
Lending to Private Sectors
21
Banks realize lending to private sectors is not as profitable as
playing equity and commodity markets
Fed’s the “Sugar Daddy” of banks with unlimited free money
Easy money also increases risk appetite
Liquidity trapped in the banking system creating potential asset
bubbles
Banks are also hoarding cash preparing for more write-offs
from Foreclosure-gate, and Commercial Real Estate, etc.
Conclusion - It’s GoodTo Be A Banker Post-crisis in
America!
22. Highlights
22
Events Prior to G20 – Dagong & Greenspan v. Geithner
G20 – A ColossalWaste of Time
Post G20 - TradeWar & ChinaYuan Policy
Bigger Problems at Home
The U.S. Dollar Policy & Investing Strategy
23. Profiling the U.S. Dollar Policy
A classic “closet case” of Weak Dollar
Misplaced concern of a Japanese Style
Deflation
Whereas low headline inflation is due to
the liquidity trapped within the banking
system, without the usual circulation
In total denial and refuse to deal with the
mounting debt and deficit
Believing a Weak Dollar would bring
export & GDP growth, thus creating jobs,
etc.
Devalue currency is the easy way out
Talk of “Strong Dollar” to prevent a run on
the dollar – the trick is to weaken, but not
crash
23
24. Consequence of a Dollar Devaluation
24
Markets likely to remain pessimistic on the dollar
But dollar could strengthen, amid the even bigger European debt
crisis affecting the euro, and austerity measures curbing growth
Expect Inflation to rise, and higher inflation expectation would push
up the U.S. bond yield
Export may get a moderate boost; however, jobs are unlikely to
return to the U.S. since companies would just move operations from
China to e.g.,Vietnam, where wages are still low
That could change if there’s a massive (50%+) dollar devaluation
drastically reducing the real domestic wage levels
Such scenario would, of course, reduce the national debt
However, it would also suggest a forever lost middle class and
national wealth. And we see that “progress” unraveling in Iceland!
25. Investing Strategy
25
Wealth Preservation – Stay away from the dollar, and the
U.S. Bond
Hard assets, emerging market equities, bonds and
commodity-based currencies
Commodities, e.g., through mutual funds and ETFs, more
detail here
Real Estate – some remain distressed in the U.S.
U.S. commodity and resource producers and high tech
sector should benefit from a weak dollar. Many remain
global market leaders
Gold – But expect high volatility, so invest on pullbacks
(watch out for silver, which tends to have 2x gold’s
volatility)