My plan had been to write a blog today about the budget. Work commitments however have meant that I didn’t have the time. I was also more interested by events yesterday and overnight in terms of the affects on my medium term outlook. I keep promising to write about the UK economy and doing this ahead of the budget would have been a good time. As an aside, I was pretty underwhelmed by what I have seen so far from the Chancellor, but I expected that.What I didn’t expect was yesterday’s move by the Fed to boost short term liquidity in markets. I have to be honest I was very impressed with this action. While I have been highly critical of a lot of what the Fed has done, I do think that credit needs to be given to yesterday’s innovative solution to some of the structural issues facing the market. Apart from anything else this is a clear signal of the Fed’s determination to end the liquidity crisis. I still don’t think I agree with this approach entirely, but I can see the argument for need to bring this under control, no matter how self-inflicted it might be.
US stocks rallied accordingly, with the Dow notching a massive 400 point move on highest volume in six weeks. My recent comments about entering an “end of the beginning phase” could well be well timed.
There is, however, a massive caveat to this view. Solving the global credit crunch and boosting economic activity are two of the greatest challenges facing the Fed. The third great challenge is to keep inflation under control. Now, I do not hold a doctorate in economics, but surely one of the basic causes of inflation is the oversupply of money. So far the Fed’s strategy to solving the first two problems has been to throw almost unprecedented amounts of money at them. Will this help cause an entrenched inflationary period?
Judging by what else is going on in the World, I think the answer is probably yes.
I only have to scan over commodity prices to see them at inflation adjusted record highs to see that this is a big problem. While it might not have filtered yet into more advanced economies, this can only be a matter of time. China today announced inflation at a massive 8.7% up from 7.1% in January. China has essentially been exporting deflation for the last decade to the Global Economy. Once this dampening influence is removed, there is surely only one way prices can go.
I read a piece recently about spending in the Chinese armed forces (http://news.bbc.co.uk/1/hi/world/asia-pacific/7276277.stm) going up by 18% this year. This article was framed more in the geo-political rather than economic context. However the fact that most of this rise is reported to accommodate rising salary costs and the price of oil, has to be a barometer of what is happening in the wider Chinese economy. According to one estimate I found China has 2.2million deployed personnel. This ranks them as being one of the World’s largest employers. If they are feeling pressure from increased wage demands, then the same must surely be true for the general economy.
While much has been made of the Chinese economic revolution, we must remember that it is still a poor country, when looking at GDP per capita. Massive rises in basic goods (food, fuel etc.) are going to be felt more acutely and more quickly amongst the general population as opposed to in the more developed countries.
The logical conclusion to this is that Chinese inflation figures will rise ahead of those in the West. There is an additional delay mechanism in place as exporters will try to bear rising costs for as long as possible, to maintain competitive positions. Eventually, though, they will be forced to raise prices. This will likely be a gradual process, which we barely notice at the start, but which will gain momentum, until it becomes an irresistible force. I don’t know if I see a return to the inflation of the Seventies. I am too young to remember that, but I do recognise the dangers inflation poses as an ultimate destroyer of wealth.
As an interesting aside, I had lunch with my Mum last week and she told me her state pension had gone up by 7% recently. I haven’t seen an official announcement about pensions going up this month (it might be in the detail of the budget, but I haven’t had time to look), but this anecdote could well point to Government concerns about inflation and their affect on the elderly (i.e. people who lack the ability to earn more) – more of this another time though!
And in Australia…..With inflationary warning signs all around the Reserve Bank of Australia has, as we all know, been raising interest rates. This has led to a solid (and for me profitable!) rise in the Australian Dollar. The last rate rise was last week.
This week, however, yesterday’s data has caused me to start to think about changing my position on the direction of the Aussie. Yesterday it was announced that Australian consumer confidence was at its lowest sine 1993. This is against the backdrop of falling economic activity. If the Australian economy is starting to slow, then the likelihood of further rate cuts will become increasingly unlikely (unnecessary even!). Given that Aussie base rates are at 7.25%, this makes them high relative to other developed economies.
While I am still bullish the Aussie, the 9500 level might prove to be towards the top.
This is one to watch in the coming weeks and I think I will trade it again, if there is a pullback ahead of next week’s US Fed meeting.
Position updateTo finish I should update on my various positions. This week has been simply brilliant. My limits were hit on the Hang Seng and S&P. I had a long position on the FTSE yesterday and booked more profits on daily trades on the Aussie and NZ$ today.
I am now short the Yen against the US$, though am likely to take my profits soon.
I am also still long the Nikkei, though this is not moving as I would like. I saw a headline that that there are problems over the choice of the new Governor of the Bank of Japan. I don’t know the ins and outs of this, but such uncertainty is bound to hold markets back, so I think I am going to take my profits.
I closed Gold at a slight profit, mainly because oil seems to be where all the action is and Gold has halted at its current levels. I am going to start watching this commodity more closely and look for a pullback to get back in on. My main reason for the trade was a possible market reaction to uncertainty, but this has not happened this week, so I thought it best to ditch the position.