Charts of the Day: Collapsing World Export and Import Prices

Yesterday I featured a news site which showed of an astounding chain of negative headline economic developments in Asia. 

Yet the following charts from Gavekal Blog provide us clues for such unfolding dynamic. 

Writes Gavekal's Eric Bush:(bold mine)

According to the World Trade Monitor, world export prices declined by -15.8% year-over-year in April and are back at level last seen in 2009. World import prices have declined by -15.1% year-over-year as well.

In the developed world, export prices are down-16.6% year-over-year. This a larger drop than what occurred in 2009 and is the largest year-over-year decline since 1990 (when this series began). Import prices have declined by -17.5% year-over-year. The drop it 2009 was slightly larger.

Lastly, in the emerging markets, trade prices have fallen but not quite to the extent that they have in developed world. Emerging market export prices are down -15.1% and import prices are off -12.6% year-over-year.

The speed of plummeting rate of prices of merchandise trade last seen during the Global Financial Crisis appear to be indicative of the conditions of the global economy. They are most likely symptoms of sharply slowing demand and a glut of goods (from excess capacity)

Yet the above represents the periphery to core dynamics in progress.

As I wrote last February 2014

if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages. 

 Worry not. Stocks are bound to rise forever. 

Update on Fed Atlanta’s GDPNOW: US 2Q 2015 GDP .8%; More Central Banks Ease as Global Trade Sputters!

Well how about that, the US statistical 2Q economy reportedly improved. 

Based on US Federal Reserve of Atlanta’s real time forecasting GDPNOW, based on May 26th, 2Q GDP improved by a puny .1% to .8%! (bold mine) 

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.8 percent on May 26, up slightly from 0.7 percent on May 19. Following this morning's advance durable manufacturing report from the U.S. Census Bureau, the forecast for second-quarter real equipment investment growth increased from 3.5 percent to 5.1 percent while the forecast for the change in inventory investment in 2009 dollars increased from -$22 billion to -$19 billion.

Still, the incredible gulf between the consensus and Fed Atlanta’s estimates. So who will be right?

 

Moreover, this week Central Bank News reported that this week’s rate cut by Hungary and Kyrgyzstan marks the 36th interest rate cut since the start of the year

 

Here is CBNews:  

A total of 36 central banks and monetary authorities worldwide have eased their policy stance so far in 2015 while 14 have tightened their policy, with the National Bank of the Kyrgyz Republic joining the rate-cutting spree on May 25 by cutting its policy rate by 150 basis points.

 

From July 2014 through January this year, the central bank of Kyrgyzstan raised its policy rate by a total of 500 basis points to curb inflationary pressures from a depreciation of the som currency. But since late April the som's exchange rate has bounced back and inflation has eased steadily after hitting 11.6 percent in January.

 

Central Bank News, which already tracks the policy rates of 90 central banks 

So from Central Bank News' tally board from the 90 central banks, rate cutters outpace rate hikers by 2.6 to 1.

 

And yet that’s just based on the 90 central banks and from the perspective of rate cuts.

But there are more. As previously pointed out, there have been other (frontier market) central banks which rate cuts haven’t been included. 

In addition, there have been non interest rate credit easing measures such as Singapore via changes in her currency basket and QE. 

There have also been regulatory based easing such as in Indonesia where the government “will loosen its loan-to-deposit ratio (LDR-RR) and the loan-to-value policy on mortgage loans and down payments on auto loans to "keep the economic growth momentum", again from Central Bank News, even as the central bank maintained current policy stance.

For global central banks to increasingly use crisis resolution measures indicates that they have been panicking!

 

Panicking on what? Here is a clue.

Based on CPB Netherlands Bureau for Economic Policy Analysis, global trade for March seems to have reversed and have increasingly shown signs of weakening. 

Based on preliminary data, the volume of world trade fell 0.1% in March from the previous month, following a revised 0.6% decline in February (initial estimate: -0.9%). Monthly import and export volumes showed considerable volatility at the region and country level, showing up in opposite movements in the initial estimates of global import and export volumes. A positive turnaround occurred in both import and export growth in advanced economies. Imports bounced back strongly in the United States. They contracted deeply in Japan however. In emerging economies, import growth accelerated, but export growth became heavily negative on account of a deep fall in emerging Asia’s exports.

And trade deterioration has likewise been manifested via Industrial activities

According to preliminary data, world industrial production was stagnant in March, following a revised 0.1% increase in February (initial estimate: 0.2%). Production continued to contract in advanced economies, but kept growing in emerging economies. Of the major advanced economic blocks, the group Other advanced economies was the only one where production expanded. Results in emerging economies were more mixed. Global production momentum was 0.3% in March (non-annualised), down from 0.6% in February. Momentum declined in both advanced and emerging economies, the decline being more pronounced in the latter group than in the former. The only increase in momentum occurred in Africa and Middle East, where it became less negative.

Well, for me this represents the periphery to the core phenomenon or the feedback loop of hissing global bubbles in progress.

 

Record stocks in the face of record imbalances at the precipice.

Periphery to Core Dynamic: Global Trade and Industrial Production Fall in January

Risks from global trade and industrial production may have emerged.

From the CPB Netherlands Bureau for Economic Policy Analysis

Developments in international trade and industrial production

-January 2015:world trade down 1.4% month on month, following a 1.3% increase in December.

-January 2015:world industrial production down 0.3% month on month, following a 0.6% increase in December

The charts of global trade

The distribution of world trade per region…

The above has been based on volumes. 

The downturn in global trade has been broad based. Emerging markets led the way for imports (sign of slowing domestic economies), while developed economies dominated the decline for exports.

It’s the opposite based on dollar per unit value: Emerging markets drove the downturn in exports, while advance economies spearheaded the decline in imports.

The above represents another wonderful exhibit which debunks the popular myth where cheap currencies have been thought to drive exports. The strong dollar hasn’t juiced up either exports by emerging markets or imports by the US.

Here is the global industrial production charts.

The above looks very much like a validation of my periphery to core theory in progress.

All actions have consequences. The adverse effects of bubble policies implemented by central bankers since 2008 to mount a global rescue (of bankers and cronies) seem as becoming more apparent. They have been transmitted to the world through, first the emerging markets and, next to developed economies. Eventually both EM and DM economies should falter.

As I wrote in early 2014

Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

I know one month doesn’t a trend make, yet could this herald a possible major inflection point? 

Will the world succumb to a recession soon?

130 bps Rate Hike Throws Cold Water on US Housing Boom

All it took was a 130 basis point rate hike to put a brake in the US housing market boom.

Writes David Stockman at his Contra Corner:

the domestic headwinds are already evident in the stunning roll-over in the housing market during the last several months. Now that the “flash” boom in housing prices is over owing to the hasty retreat of the big LBO funds from the short-lived “buy-to-rent” market, the underlying weakness of organic demand has become starkly evident.

Sales are now down significantly from year ago levels in major markets all across the country, and, as the following list makes clear, it was not the weather that did it. Instead, it was 130 basis points of interest rate normalization—-and that is just the beginning.

The salient fact of the matter is that the decades long era of “refi madness” is over. During the first quarter, gross mortgage originations totaled just $235 billion—the lowest rate in 14 years. Stated differently, the mortgage issuance run rate is now about $1 trillion on an annualized basis—-a level that represents just 30% of the normal volume since the mid-1990s.

And the stalled-out housing finance engine is not unique. Its just the leading edge illustration of what happens when credit-fueled rebounds no longer happen. Indeed, the crash of Q1 mortgage finance volumes shown below demonstrates that the very notion of “escape velocity”, or what in truth is really a euphemism for a credit fueled growth surge, is an obsolete relic of a bygone era.

March  sales volume remained the slowest since July 2012, when it was 4.59 million.

Major metros with decreasing sales volume from a year ago included:

1. 
   

   San Jose (down 18%)

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   San Francisco (down 15%)

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   Los Angeles (down 14%)

1. 
   

   Rochester, N.Y., (down 14%)

1. 
   

   Sacramento (down 13%)

1. 
   

   San Diego (down 12%)

1. 
   

   Orlando (down 12%)

1. 
   

   Las Vegas (down 12%)

1. 
   

   Providence, R.I. (down 12%)

1. 
   

   Phoenix (down 11%)

1. 
   

   Riverside-San Bernardino, Calif. (down 11%)

1. 
   

   Hartford, Conn., (down 10%)

1. 
   

   Boston (down 8%)

In short, this time is different. The debt party is over. The era of financial retrenchment and living within our means has begun. It might even be that “selling the dip” is about to become the new normal.  Even this morning’s Wall Street Journal could not powder the pig.

The Zero Hedge also exhibit how the current real estate slowdown are being reflected on homebuilder stocks (including lumber)

And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.

Add to this have been growing signs of strains in the technology sector.

Some have been banking on manufacturing to offset the above. Manufacturing has a 12.4% share to 2013 GDP. But the $64 trillion question is, manufacturing sold to whom? 

In early March I noted that the EM contagion has materially slowed down external trade which implies lower global growth. From the trade aspect my projection has been confirmed by the Netherlands Bureau for Economic Policy Analysis which noted that global trade in early 2014 registered its “first negative reading since October 2012”. 

Now we will see how this plays out with world’s statistical GDP

So far, the periphery-to-the-core feedback mechanism has been in progress as seen globally and within specific economies.

Phisix: ASEAN Equity Markets Continue to Lag

It has been a curiosity for me to see ASEAN equity markets, with the exception of Malaysia, fail to rev up along with high octane US and some European markets as the German Dax, considering an environment of falling US dollar and a reprieve from the bond vigilantes.

Global Trade Woes?

Could it be because of growing concerns on global trade particularly from export dependent Asia?

According to a Bloomberg report[1],

The Hague-based CPB Netherlands Bureau for Economic Policy Analysis estimated global trade volume fell 0.8 percent in August, eroding a 1.8 percent jump of the previous month. It was the weakest performance since a 1.1 percent decline in February and left the three-month average lagging its historical pace.

While global merchandise trade remains slightly off record highs, the rate of gains has been on a decline (quarter on quarter—left) and (quarter from a year ago—right)[2],

Much of the failing trade has been attributed to the ‘lack of demand’ from emerging markets. But the article did not bother to explain further.

Unlike mainstream view, the slowing growth in emerging markets has mainly been a product of internal bubbles, many of whom have been approaching their inflection points. The threat by the US Fed to “taper” last May only exposed on these vulnerabilities. 

In addition, the adverse consequences from the largely unseen redistribution of resources from US Federal Reserve policies which has been embraced as the de facto operating standard by global central banks seem as becoming more evident.

Credit easing policies such as zero bound rates has gradually been eroding on the real savings of many Asian nations who adapted such schemes. Borrowing demand from the future financed by debt has come home to roost.

And since inflationism has been designed to transfer resources to privileged constituents or to protect certain interest groups at the expense of the rest, the corollary inequalities have led to politically charged atmosphere.

And in the realm of politics, the intuitive and the best way to divert the public’s attention from the real issue have been to blame the foreigners. 

In doing so, inflationism which usually is followed by price controls eventually spawns trade, finance and labor protectionism.

So the next political actions we should expect would be travel or social mobility restrictions, higher tariffs or more non-tariff trade barriers and capital controls.

The same article suggests that we are headed in such direction.

Protectionism is also on the rise despite pledges to avoid it by the Group of 20 leading industrial and developing economies, according to Evenett. He estimates 337 measures have been imposed worldwide so far this year after 503 in 2012.

However, near record high New Zealand stocks and record high Malaysian and Australian stocks can hardly explain the global trade factor.

Credit Concerns?

The other factor causing such divergence could be slowing credit growth.

As pointed out above, internal bubbles have served as an internal hindrance to expanding credit growth.

A survey from the Institute of International Finance[3] (IIF) on Emerging Markets suggests that “bank lending conditions continued to tighten in emerging economies for the second quarter in a row.”

And while demand for loans in Asia seem to have improved, credit standards, funding conditions and trade finance have all meaningfully slowed.

The IIF data actually mostly reflects on the credit conditions of the Philippine banking system, based on the BSP data from the start of the year until August. Except that credit growth in August appear to have rebounded, despite the “Ghost Month” which curiously the BSP incorporates as “economic” analysis.

[As a side note, the BSP’s stubborn insistence to use “Ghost Month”[4] assumes that whether Filipino or Chinese or foreign non-Chinese, all subscribe to such superstition. Based on such logic, perhaps ‘paranormal’ forces had been responsible for the credit growth last August]

I have no data yet for September to see whether the August loan rebound has been sustained or had been a blip.

I have yet to access credit data conditions for Malaysia, Australia and New Zealand, but have been limited by time constraints

Capricious Credit Rating Agencies

Credit rating agency Fitch has revised their outlook on Malaysia to Negative from Stable in July, they further warned about the growing pressure on credit profiles of Asia-Pacific Sovereigns[5]

The Standard & Poors seem to have seconded such concerns where “positive trend of Asia-Pacific sovereign ratings”, said KimEng Tan, senior director for Standard & Poor’s Ratings Services in an interview[6], “over much of the past decade looks likely to break in the next one or two years. We do not see a high likelihood of a sovereign rating upgrade during that period. Instead, three sovereign ratings in the region currently carry negative outlooks – India, Japan and Mongolia. We do not have any Asia-Pacific sovereign on a positive outlook.” (bold mine)

It is ironic how Malaysia’s July downside revision has led to new record high stocks while the trifecta of credit rating upgrades have still left the Phisix midway from the distance of the recent historic highs and the meltdown lows.

Importantly both credit rating agencies appear to be “playing safe”, such that in the event that another market meltdown episode, they would have the leeway to immediately initiate downgrades.

As pointed out before[7], credit rating agencies have essentially been reactionary. They respond to market events rather than take action in antecedence. They hardly see risks coming. Two market meltdowns appear to have altered their sanguine viewpoints on the region. Yet as a sign of dithering, they refrain from actual downgrades but instead float trial balloons by verbalizing their concerns.

In the case of the S&P, they have placed on negative outlook, for instance the S&P on India, Japan and Mongolia. Paradoxically, like Fitch on Malaysia, India’s stocks are also a breath away off from the recent landmark highs.

This also reveals of the narrowness of the span of vision of credit rating agencies has for their subjects, or in this case the sovereigns, such that they easily change sentiments.

The above also suggests of the extreme volatility of the markets as they become detached with fundamentals.

The China Wild Card: Has Inflation Reached a Critical State?

It is hard to see the Chinese card on ASEAN when Australian stocks are at record territories and when the Australian dollar have strengthened (except for the past three days)

But again, it’s hard to see a straight connection based on economic fundamentals when financial markets have been heavily distorted by excessive politicization.

My goal here will not be explain past stock market actions, but rather to anticipate the potential actions given the recent events.

The Chinese government has reportedly suspended three consecutive sessions of reverse repurchase operations.

This has supposedly impelled a spike in the Chinese interest rate markets. Shibor rates (Shanghai Interbank Offered Rates[8]) interest rates representing unsecured short term interbank money markets have soared across the maturity spectrum. The overnight (left most), the 6 months (middle) and 1 year (right most)[9] have all surged.

Friday, yields of China’s 10 year bonds hit 4.23% but closed back at 4.16% the highest since November 2007 when it peaked at 4.6%[10]

Part of the cause has been attributed to “financial and tax paid in October” which contributed to tightening conditions.

While the Chinese government has taken new steps to liberalize interest rates last week where banks rather than the PBOC would set benchmark[11], I don’t think the new interest rate regime has anything to do with the turmoil.

One domestic google translated English article[12] noted that the market is said to be worried about "money shortage", since “excessive tightening of liquidity could lead to systemic risk”. The article mentioned money shortage thrice.

Another google translated English article[13] noted of the same “market money shortage recurrence concerns”, but this time, the quoted expert raised inflation rate and housing prices as contributing to the tightening.

When people complain about “shortages of money”, they could be expressing signs of acceleration of inflation, where changes in the supply of money have been deemed as insufficient to meet changes in money prices. Put differently such represents an advance phase of inflationism.

As the dean of the Austrian school of economics, Murray Rothbard explained[14] (bold mine)

At first, when prices rise, people say: "Well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down." This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself, and conceals the inflation further, since the demand for money is thereby increased. But, as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say: "I will buy now, though prices are `high,' because if I wait, prices will go up still further." As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply. At this point, the government is often called upon to "relieve the money shortage" caused by the accelerated price rise, and it inflates even faster. Soon, the country reaches the stage of the "crack-up boom," when people say: "I must buy anything now--anything to get rid of money which depreciates on my hands." The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable--other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation.

If the Chinese government really thinks that inflation has gotten out of control then the thrust to tighten may continue. However such tightening could mean bursting of many highly leveraged businesses. This also means that credit woes will spread via the periphery to the core dynamic, given China’s highly leveraged the formal and informal banking system. In short boom could turn into a massive bust.

It is unclear how determined and how much pain and pressures the Chinese political leadership can withstand.

But if it is true that China’s system has reached an advanced phase in terms of inflation and if the Chinese government accommodates the demand for money to ease the shortages then China may experience a Venezuela.

This has been the second time the Chinese government has attempted to curb liquidity.

The first time was in June where China’s credit turmoil caused a stir in Asian markets (blue lines).

While global markets as Australia appears to have discounted the Chinese turbulence as perhaps just another typical quirk, we will have to see or ascertain if the economic conditions has really deteriorated. Japan’s Nikkei appears to be weakening again coincidental with the Chinese benchmark.

The following days will be critical.

If the problems in China have turned unwieldy then another round of a market meltdown can’t be discounted.

As I have been lately saying, there are many flashpoints or minefields around the world that could spell the difference between one’s return ON investments as against return OF investments.

---

[1] Bloomberg.com Global Trade Flows Show Exports Are No Magic Bullet October 26, 2013

[2] CPB Memo CPB Netherlands Bureau for Economic Policy Analysis October 23, 2013

[3] Institute of International Finance Emerging Markets Bank Lending Conditions Survey - 2013Q3 October 24, 2013

[4] BSP.gov.ph Foreign Portfolio Investments Yield Net Inflows in September October 17, 2013

[5] Reuters.com Asia-Pacific Sovereigns Face Growing Pressure on Credit Profiles October 17, 2013

[6] FinanceAsia.com Credit outlook cooling for Asia-Pacific sovereigns as risks endure October 16, 2013

[7] See Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth October 7, 2013

[8] Wikipedia.org Shanghai Interbank Offered Rate

[9] Shibor.org Shanghai Interbank Offered Rate

[10] See PBoC Tapers: China’s Interest Rate Markets Under Pressure, October 25, 2013

[11] Bloomberg.com China Starts Prime Loan Rate as New Benchmark in Market Push October 25, 2013

[12] Stockstar.com Shibor rose 102.2 basis points, said the industry shortage of money will not come again October 26, 2013

[13] China times "Highlights of the newspaper" bank money shortage trouble? Shanghai jumped Shibor, October 26, 2013

[14] Murray N. Rothbard, 2. The Economic Effects of Inflation Government Meddling With Money What Has Government Done to Our Money?

President Obama Hearts Indonesia: US to Boost Investments and Trade

The US has reportedly pledged to bolster investment and trade with Indonesia.

From Jakarta Globe

Francisco Sanchez, the undersecretary of commerce for international trade at the US Department of Commerce, has visited Indonesia three times in the past 18 months. Each time he comes, he is impressed by Indonesia’s robust economy and the opportunities available.

On his current trip, he brought a high-powered business delegation to show them first hand what Indonesia offers. He told the Jakarta Globe he is hopeful that these companies will enter into business deals.

American companies have a long history of investing in Indonesia, but in recent years they have been overtaken by other players, notably the South Koreans, Chinese and Singaporeans. According to Sanchez, US companies cannot wait any longer or they might miss the boat.

President Obama’s seems to be reaching out to the nation where he became a resident of during his pre-teen days.

And so how does the US intend to expand trade with Indonesia?

First through investments in infrastructure projects coordinated by a supposedly “independent” government development agency, (from the same article)

According to Sanchez, US companies have a lot to offer in sectors such as engineering, construction management, waste-water treatment and smart grid technology.

To express its intent to participate in infrastructure development in Indonesia, the US-based Overseas Private Investment Corporation on Tuesday signed a memorandum of understanding with the Indonesia Infrastructure Guarantee Fund to support the development of infrastructure projects…

And next is through Obama’s pet project; renewable energy… (bold mine)

One development that could help boost trade is for the Environmental Protection Agency in the US to classify Indonesian crude palm oil as renewable fuel. The EPA visited palm oil estates in Indonesia two weeks ago and is now reviewing its decision.

To qualify for as renewable fuel, CPO must reduce greenhouse emissions by 20 percent. Discussions are currently underway between the EPA and the palm oil industry.

Instead of free trade, the Obama regime will mainly promote investment and trade through political patronage, where economic or financial contracts (concessions) will likely be awarded to favored networks, friends and allies of the Obama regime in the US and in Indonesia. 

Obama’s global trade policy seems geared towards exporting cronyism.

Currency Values Hardly Impacts Merchandise Trade

In the eyes of the mainstream the only way to generate export growth is to devalue a currency or impose punitive tariffs on trade partners whom are deemed as 'currency manipulators'.

Yet, facts belie these misguided conventional beliefs.

Referring to the above charts, analyst Howard Simons argues, (bold highlights mine)

``First, three-quarters of the import weights and two-thirds of the export weights derive from five sources: China, Canada, Mexico, Japan, and the eurozone; the others will be aggregated for visual clarity. Let’s take a look at the imports first.

``The most prominent development over time has been the seizing of market share by China from Japan and Canada. Mexico’s share expanded after the passage of NAFTA, but it has stagnated in recent years as maquiladora plants have become uncompetitive with Asian exports. In economic terms, Mexico now is exporting labor, a factor in production, as it has lost a competitive advantage in the production itself.

``On the export side, China is displacing Japan as a customer of the US. Exports to both Mexico and Canada expanded after the passage of NAFTA, as have exports to “all-others;” this category includes important growing customers such as Brazil, India, the Middle East, and the Asian periphery.

``What is or should be striking in the pictures above are the rather constant weights for the eurozone. Given the euro’s prominence for financial flows and for traders, and given its outsized 57.6% weight in the dollar index, you might think all of the changes over the years in the rates between the dollar, the euro, and its predecessors would lead to substantial changes in trade weights.

``The US and the eurozone have structurally similar economies and factors of production. As a result, we trade in similar goods where differences in customer tastes and small quality differentials mean more than price. Moreover, much of the trade between the two zones is inter-subsidiary and represents a transfer."

True enough, (chart courtesy of netdania) despite the Euro's 5 year uptrend, this has hardly affected the trade weightings of the Eurozone vis-a-vis the US.

In addition, many other factors also seem to impact trade more than currency values, such as Free Trade Agreements, differentiation of goods, transfer pricing from inter-subsidiaries, and etc...

In other words, currency values hardly is the major factor that influences trade balances.

I'd like to interpose another perspective--how did the Euro become an export giant, in spite of the currency's elevated valuation levels?

Analyst Martin Spring enumerates the strength of Germany as the Eurozone's driver: (all bold emphasis mine)

-Germany is a hugely powerful exporting power, only recently overtaken by China, and still a far bigger exporter than the US or Japan. This year it is forecast to have a foreign trade surplus of $187 billion, not far behind China’s $219 billion.

-Despite some of the highest labour costs in the world, it has high productivity to match them.

-Due to the cohesion that comes from good employer-employee relationships, manufacturing industry has the flexibility to meet adverse circumstances. In the global recession it has kept growth in unemployment to just half a percentage point through measures such as pay cuts and state-subsidized short-time working.

-Instead of looking to currency depreciation to ease its problems, it survived the period of a strong euro by meeting competition head on. The OECD, in its latest economic survey, says the nation used the adversity to spur innovation, make allocation of resources more efficient, and invest strongly in advanced production techniques.

-Its companies have diversified internationally and outsourced to low-cost countries – about half the added value of exports is now produced abroad.

-Although Germany does, like so many countries, have a problem of high and growing public debt, it is at last addressing that problem decisively. Over the 2008-2012 period, despite the biggest stimulus programme in Europe, its debt is forecast to grow by only 17 percentage points, compared to 22 per cent in France, 33 per cent in Greece and the US, 34 per cent in the UK and 39 per cent in Japan.

-The Economist says Germany “no longer suffers from an arthritic labour market, an obese state or a suffocating tax burden.”

-At the core of the engineering sector that is the cornerstone of the nation’s industrial economy are thousands of dynamic Middelstand enterprises (small and midsized firms, often family-owned) that export almost 80 per cent of their production, selling not only highest-quality machines, but also the panoply of expert support services that go with them.

-Germany is a world leader in fields such as automotive technology and renewable energy. It can sell machinery in China at four times the cost of Chinese competitors’.

All these can be summed up into competition, division of labor, competitive advantage and high level of entrepreneurship. In short, Germany's export powerhouse came about from fundamentally embracing free market principles and not from devaluation and closed door isolationist policies.

This bring us to the surprise announcement by China to gradually allow her currency to rise. Will these alleviate the so called global imbalances?

In 2005 the yuan appreciated by 9.8%, yet there has hardly been any improvements in the trade balance (deficit) standing of the US vis-a-vis China, as shown in the above chart.

And the narrowing of the trade gap in 2008 can't be attributed to the rising Yuan, because the world suffered from convulsions of the 2008 financial crisis, which had been a far larger factor.

Besides, China then repegged her yuan to the US dollar at the onset of the crisis (also shown above-chart courtesy of Northern Trust).

So the answer is a NO--the appreciation of the yuan is unlikely to make a significant dent to the US deficits. Moreover, for as long as the US dollar is the de facto medium of account "currency standard" for global trade, the US is likely to maintain huge deficits.

However for China it could be a different story.

China's surpluses could narrow, not because of the appreciating yuan, but because of policies aimed at shifting internal dynamics.

According to Northern Trust's Paul Kasriel,

``Now, I do believe that the rate of increase in China's trade surplus will be slowing in the coming years, but not primarily because of an appreciating renminbi. But rather because rising incomes among Chinese households will lead to increased discretionary spending by them. Also, in order to keep the population relatively happy, Chinese politicians will re-allocate government spending more toward services and infrastructure spending to benefit households rather than export industries."

Bottom line: currency values signify only as one variable out of the many that influence trade activities. Therefore tunneling on the "currency" valve as means to rebalance trade by indirect (inflationism) or direct protectionism is not only fallacious and deceptive but also unwarranted.

Borrowing Howard Simons conclusion, ``the world’s protectionists are better at making noise than making sense".

Has Slowing Philippine Exports Been Indicative Of Asia's Trend?

Rebecca Wilder of News N Economics exhibits concern over the slowing growth in Philippine exports as portentous of a slowdown for Asia.

She writes, (bold highlights mine)

``But the Chinese release overshadowed the Philippines April trade report, which in my view, illustrates more transparently the slowdown in external demand that is likely underway across the region. In the Philippines merchandise exports increased 27.4% over the year in April, which was half the rate of the Bloomberg consensus and that in March, 42.7% and 43.8%, respectively.

``A negative export growth trend has been established - explicitly in the Philippines and likely going forward in China (see Goldman Sachs report below). And these countries have strong trade ties with Europe - the Eurozone was 15% of 2009 world GDP (PPP value) according to the IMF.

``Therefore, recent nominal appreciation of the Philippine peso and Chinese yuan against the euro, and expected real appreciation - Europe's self-imposed economic contraction stemming from harsh fiscal austerity measures will drag prices downward - may very well hamper the economic recovery for key Asian economies via the export channel."

I see this dynamic from a distinct prism.

Looking at the broader picture, Philippine share of external trade has been slowing-- from 100% (2004) to about 60% (today) of GDP, according to the chart from Google/World Bank. Even China's external trade has been slowing.

Alternatively this means economic growth is becoming more domestic oriented.

Yet, this comes in the backdrop of an ascension of global trade.

Growing global trade amidst a slowdown in China's share suggest that the global share of the export pie is becoming more diffused, as more nations participate.

The implication: global economic growth isn't anchored on China, nor is it predicated on exports.

Moreover, there are many factors that drive economics more than just a simplistic currency-export-economic growth model.

The following is the export performance of the Philippines, China and the world (top window) as well as the Philippine Peso (bottom window).

What I want to show is that Philippine exports peaked in 2002-2004 even when the Peso continued to fall. The Peso reached a trough of 56.20+ to a US dollar in September of 2005. That's ONE year after. Yet Philippine exports haven't picked up.

So the Philippine case essentially invalidates the assumption that weak currency equals strong export growth.

And I think this applies also elsewhere, for the simple reason that export products and markets are not homogeneous, which implies diverse degree of price sensitivity. In the information age, we are increasingly witnessing niche (tribal) markets.

Let me further show that measuring Philippine exports is relative.

As the chart from NSO illustrates, it is a mirage to think that 40+% growth momentum will be sustainable. And falling off the high "growth" levels need not translate to alarm bells.

That's because in reality, markets don't move in a straight line.

Taking a look at the breakdown of products exported, they only show that the export growth has been "broad based" (from manufacturing to commodity)--premised on a year to year comparison. This further suggests that any slowdown may be temporary.

Therefore, interpretations of a pause as impending signs of doom seem unwarranted.

Looking from the Philippine perspective, this implies that if micro developments refutes the macro interpretation, then the latter is likely an inaccurate assessment.