Fixing global trade imbalances (“the root of the present difficulties” – Trichet) would require Asian countries to wean themselves off a dependency on exports, reduce their reserves and stop interfering with exchange rates. Lex finds this unlikely. A year ago Asia held 62 per cent of the world’s reserve assets; it now holds 66 per cent. Increasing domestic consumption and leaving currencies alone are considered similarly unlikely.
Only China has meaningfully pushed towards domestic demand, largely via investment, to support growth. But data show a strong external bias in Chinese investment: the country is securing materials and energy abroad, but investing relatively little in health care, technology and telecoms at home. Indeed, China has become South Africa’s biggest trading partner, as rising demand for the African nation’s minerals contrasts with a slump in orders from traditionally more important markets. Chinese purchases from South Africa have risen more than 50 per cent year-on-year.
Not all news from China is rosy, however. A Chinese property index has fallen by 30 per cent since July and may be about to break its 200-day moving average. Bad news if you believe, as some analysts do, that this index is a leading indicator of excess liquidity, which also drives commodity accumulation and investment. But property sales are looking up in the US, as the number of pending sales increases to highest level in two and a half years, thanks in part to the $8,000 tax credit and depressed prices. US property is alone in being undervalued, according to this chart. UK property prices – overvalued by the same data – are also rising and have apparently reached levels from a year ago, but they have done so on thin volume with even estate agents cautious to comment. Tougher mortgage conditions are forecast for the UK, as BoE data implies a significant rise in debt repayment.
More capital will not avert a future crisis. But the US is offering more capital anyway, announcing $138bn treasury auctions for October and considering offering more repos to banks, effectively collateralised loans (excellent summary here). In spite of these measures, Greenspan agrees tax rises are inevitable, Bernanke agrees with Zoellick on the medium-term risk to the dollar as the world’s reserve currency, manufacturing data is gloomy (1, 2) and initial jobless claims are still rising.
Those job figures triggered equity sell-offs overnight, long anticipated by some, as investors generally reduce equities in their portfolios. The bears come out, as SocGen’s Albert Edwards asks how to boil the lance of overvalued equity markets:
One of the key lessons from Japan’s lost decade is that investors’ confidence that the authorities are in control of events will ultimately drain away. In a balance sheet recession, one should expect frequent downturns as the authorities balk at additional stimulus. Only then will zombie investors, sucked dry of confidence, squeeze the remaining puss from equity market valuations. Only then will the 20 year boil of equity market over-valuation be properly lanced
and, in Japan in the 1990s:
Investors became sellers-on-rallies, rather than buyers-on-dips
Pity the shareholders. But perhaps pity Gazans more: the UN finds poverty has trebled in the past year, and one in five Gazans is now living in abject poverty.
And as we await the decision of who will host the 2016 Olympics announcement, research finds few economic benefits of hosting. Bad news for Britain, then. But hosting the games can be good for infrastructure. So perhaps the games should be located where infrastructure is lacking?