Purchasing power parity theory – Kent Tribune http://kenttribune.com/ Thu, 28 Jul 2022 22:11:46 +0000 en-US hourly 1 https://wordpress.org/?v=5.9.3 https://kenttribune.com/wp-content/uploads/2021/05/icon.png Purchasing power parity theory – Kent Tribune http://kenttribune.com/ 32 32 Investor pessimism is at an all-time high https://kenttribune.com/investor-pessimism-is-at-an-all-time-high/ Thu, 28 Jul 2022 22:11:46 +0000 https://kenttribune.com/investor-pessimism-is-at-an-all-time-high/

After a brutal period that led the S&P 500 to its worst start to the year in two decades, investors are predicting even worse stock market declines.

Recent negative bets on US stocks by asset managers and hedge funds are at their highest since 2016, when concerns about a global slowdown were at an all-time high. That’s what futures contracts for major stock indices show, according to research by JPMorgan Chase & Co.

An assessment by the National Association of Active Investment Managers (NAAIM), which surveyed primarily registered investment advisers, found that the average active investor has steadily reduced their exposure to stocks this year and lost stock allocations to one of the lowest levels since the start of the pandemic.

Yet, several indicators of market sentiment provide mixed messages. According to a study conducted by the Federal Reserve Bank of New York, the majority of Americans (about two-thirds) believe that stock prices will remain relatively stable or fall in the coming year. Since the creation of the survey in 2013, this ratio is the highest ever reached.

Many investors are understandably reluctant to put their money on the stock exchange, as evidenced by positioning and mood statistics. The bull run on major indices that began at the height of the Covid-19 outbreak ended this year with a thud.

What is causing all these worries? A looming recession and steadily rising inflation are causing concern. Following the release of new economic statistics showing inflation at its highest level in 40 years, the S&P 500 fell 0.9% this week. The broad stock index has already fallen 19% for the year, its worst performance so far since 2002, according to data compiled by Dow Jones Market Data.

According to Parag Thatte, strategist at Deutsche Bank, “everyone is concerned about the risk of recession”.

The bond market’s most predictive indicator of recession – the inverted yield curve – recently hit its widest level in two decades, signaling a warning message to the rest of the economy. In addition, many investors raised bets that the Federal Reserve would raise rates by a full percentage point at the next meeting – this hadn’t happened in decades.

Deutsche Bank estimates suggest investors have reduced their equity holdings to record levels over the past 12 years. This includes reducing the holdings of systematic funds that trade in response to market volatility and other factors. Meanwhile, traders big and small alike have cut their bullish bets in the options market to the lowest level since April 2020.

Dunn Capital Management chairman Martin Bergin said his company was bullish on stocks for much of the year, but began to cut bets and took a somewhat bearish stance in the futures market in course of the last month. Mr. Bergin is in charge of a trend-following approach, whereby investment choices are made systematically based on the performance of different assets and the linkages between different positions in his portfolio.

“We have now established that it is better to be a bit short rather than long,” Mr. Bergin added. We will start taking additional long exposure if there is a bounce.

Investors this year have been hit with even more uncertainty due to: Some of the largest swings in market history have been seen across a wide range of asset classes, from bonds to commodities and currencies. For this reason, some investors have been hesitant to place large bets for fear of being caught off guard if the market suddenly reverses. Some analysts, like Mr Thatte, have suggested that investors could still benefit from reducing their exposure to equities, even after a particularly difficult period for the market.

Roberto Croce, head of risk parity at Newton Investment Management Group, recently said: “It’s as dangerous as it has been in the last 11 years that I’ve been doing this.” There could be more bad news for the market.

Mr. Croce is in charge of a risk parity strategy that determines when and how much to buy or sell stocks, bonds and commodities based on their perceived volatility and risk at any given time. During this year’s market volatility, he predicted that many such methods would reduce their stock market bets.

Rather than buying bonds, which have fallen as a group, many individual investors appear to be hoarding cash. According to a June study by the American Association of Individual Investors, this is the largest percentage of cash reserves that individual investors have kept since the start of the epidemic.

After watching their investments plummet, some traders are hoping to cash in big. Since the start of 2022, trading volume has increased significantly in two of the major exchange-traded funds that offer increased exposure to stock market losses by placing bets against the Nasdaq-100 and S&P 500 indices. According to calculations by JPMorgan , retail investors continued to buy this year, albeit at a slower pace.

Seen through a contrarian lens, the current level of caution in the stock market may provide hope for the rest of the year. As a JPMorgan team led by Nikolaos Panigirtzoglou reported, the massive sell-off by institutional investors in the first half of 2022 could be followed by a return to the markets in the second.

Classic investor behavior, according to Andrew Slimmon, managing director and senior portfolio manager of long equity strategies at Morgan Stanley Investment Management. “People are reacting to what has already happened by being cautious too late,” he said. Some stocks that performed poorly in the first half of the year could see better results in the second.

Mr Slimmon said he reduced his exposure to defensive stocks that had performed well in the first half of the year in favor of buying stocks in sectors that had been particularly hard hit, such as the homebuilding sector.

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Burgernomics: What the rising cost of fast food in Egypt reveals about inflation https://kenttribune.com/burgernomics-what-the-rising-cost-of-fast-food-in-egypt-reveals-about-inflation/ Thu, 28 Jul 2022 18:57:18 +0000 https://kenttribune.com/burgernomics-what-the-rising-cost-of-fast-food-in-egypt-reveals-about-inflation/


Burgernomics: What the rising cost of fast food in Egypt reveals about inflation

Image Credit: Thred

When McDonald’s in Egypt released prices for its updated menu in early July, citizens took to social media to express their outrage at the price hike – a 50% increase for some products compared to last year.

For context, the fast-food chain’s signature Big Mac hearty meal has gone from EGP59 ($3.12) to EGP88 ($4.65). And this excludes value added tax and any delivery costs. Going back further, to 2019, 100 EGP (5.28 USD) was worth three Big Macs.

McDonald’s is not alone in the upward price trend in the fast food market. Pizza Hut’s famous family meal box has been gradually reduced from EGP125 (US$6.60) in 2017 to EGP267 (US$14.10) in 2022. Burger King’s Value Meal, an offer that targets budget shoppers, has grown from 22 EGP (1.16 USD) in 2017 to 50 EGP (2.64 USD) in 2022.

“Personally, I stopped going there after seeing the new prices. It’s just not worth it when there are cheaper competitors that offer the same quality. It’s like paying for expensive food, but it’s not expensive food,” says construction engineer Mostafa Khaled.

More worryingly, rising fast food prices in Egypt are a telltale sign of the continued inflation that plagues the country. What was once fast, accessible and affordable food is slowly turning into a luxury item. Some might argue that a silver lining is that rising fast food prices are decreasing unhealthy eating habits, but the issue is much more economic in nature, a reflection of the declining purchasing power of the average Egyptian, just a discussion about food.

UNDERSTANDING THE SITUATION OF INFLATION IN EGYPT

There’s more to it than meets the eye when it comes to the relationship between fast food prices and inflation in Egypt.

Inflation, i.e. simply the rise in prices of commodities and services over a period of time, has plagued Egypt since the start of the COVID-19 pandemic and due to the Russian invasion of Egypt. ‘Ukraine.

The Egyptian Central Bank recorded an annual inflation rate of 14.6% in June, an increase from 13.3% in May. The previous year, in June 2021, this number had been recorded at 5.3%.

As foreign exchange reserves remain scarce and many imports remain limited, the cost of production will naturally increase, which both limits and increases the supply price. Yet demand remains as it is, driving up product prices even further.

Consequently, the Egyptian government, citizens and businesses have been grappling with the challenges of rising inflation. In the case of McDonald’s, their solution to the challenges of inflation in Egypt was to drive up prices, much to the chagrin of customers.

RISE IN FAST-FOOD PRICES: A REFLECT OF THE EGYPTIAN ECONOMY

When The Economist jokingly created the Big Mac Index (BMI) in 1986, it was intended to explain the theory of purchasing power parity between states, or in simpler terms, the idea that rates of exchange rate should gradually move towards a level that equalizes the prices of the same goods and services in the two currencies.

In the case of the newspaper, the Big Mac was the standard – popular, universal and accessible. What was a light guide is now a feature of textbooks and several academic studies. By examining their “GDP-adjusted index,” which includes labor costs and distribution, a lot can be revealed about Egypt’s current inflation challenges.

Image Credit: The Economist

Against the US dollar, a Big Mac sandwich in Egypt cost EGP 42 in 2019 (USD 4.71 at the time) at an average exchange rate of 16.87. In other words, the US price for 1 Big Mac would almost be worth 2 Big Macs in Egypt. In 2022, this number has increased to 52 EGP (2.74 USD) against the US price of 5.15 USD (97.43 EGP) at an exchange rate of 18.95, highlighting many points regarding the inflation in Egypt.

The latest BMI update from July 22, done before McDonald’s price hike, said the sandwich is expected to cost 23.8% less than its current price when adjusted for Egyptian GDP. This percentage should increase once the price updates are taken into account.

Beyond BMI and prices, the numbers indicate several trends caused by inflation in Egypt. For starters, it shows that Egypt no longer offers the cheapest Big Macs in the world, a fact Egyptians proudly claimed years ago. Although still undervalued by US prices, Egypt’s number one fast food franchise is slowly becoming less affordable for its mass.

The BMI also fails to comparatively examine McDonald’s most expensive products, such as a Big Tasty, a cost that indicates how slowly McDonald’s is becoming a luxury item for the average Egyptian, who earns around nine thousand dollars. per month.

McDonald’s new prices further underline the impact of the war in Ukraine and global supply chain delays on Egypt. Abdel-Aziz El-Sayed, head of poultry at the country’s chambers of commerce, further asserted the impact of inflation on prices, attributing the rising cost of chicken, eggs and feed to the costs of production, distribution and labor.

Egypt’s wheat crisis is further aggravating costs for food businesses, as the world’s largest wheat importer has faced severe shortages caused by Russia and Ukraine.

In particular, BMI statistics indicate that cost inflation in Egypt is only just beginning, as the impact is gradual and not yet fully realized. Prices are expected to continue to rise, well beyond the world of fast food, as evidenced by the recent increase in gas and public transport costs.

In turn, many of the country’s middle and lower classes are giving up a list of goods and services that were once available to them. Over time, Egyptians will be forced to accept price hikes on goods and services. Whether the new costs are worth it or not is the choice of those who can afford them.

“It’s like McDonald’s isn’t an option for me anymore. I can’t see myself spending that much money on something that’s meant to be quick and cheap. […] although I think people will accept this new reality in three months,” said Ibrahim El-Fendi, an accounting professor.

For some, McDonald’s reflects their economic sacrifices. A once affordable dash-and-dine, now far too expensive for many.

Indian company to build $8 billion green hydrogen plant in Egypt

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]]> US bond markets tell us the Fed will pivot https://kenttribune.com/us-bond-markets-tell-us-the-fed-will-pivot/ Sun, 24 Jul 2022 20:10:00 +0000 https://kenttribune.com/us-bond-markets-tell-us-the-fed-will-pivot/

Summary of key points:

  • The US bond market votes with its feet on the economy and inflation
  • Burgernomics and purchasing power parity theory
  • Another drop in stocks remains as Kiwi dollar risk

The US bond market votes with its feet on the economy and inflation

The message coming from the US bond market on the future of US inflation trends, the timing of the Federal Reserve’s pivot on monetary policy, the direction of the US economy and therefore the direction of the value of the US dollar will not can be clearer.

The dramatic reversal in US 10-year bond yields, from highs of 3.50% in mid-June to 2.75% at market close on Friday July 22, tells us that bond investor sentiment and expectations and of borrowers are that they see lower inflation and lower interest rates in the future. The shift in focus and direction was quick, but well justified by lower oil prices and weaker US economic data.

In last week’s commentary, we mentioned that further declines in US bond yields below 2.80% (2.93% at the time) would suggest a weaker USD value on the Dixie index towards 102 The US dollar, however, has weakened over the past week. only at 106.40 on the index, so it still has a lot of catching up to do (see chart below).

US economic data released last week continues to paint the picture of a rapid slowdown in the US economy in June and July. The S&P Global Composite Manufacturing PMI for July was significantly weaker at 47.5 compared to the earlier consensus forecast of 52.1. A result below 50 signals a very negative outlook with the fall in manufacturers’ order books. Housing data earlier in the week for June was also considerably weaker than expected. The Federal Reserve may not officially temper its rhetoric on the need for higher and higher interest rates to reduce demand in the economy until it updates all of its forecasts in its September statement. . However, financial and investment markets will anticipate the pivot in advance and adjust prices now. We are already seeing this play out in the bond market as they vote with their feet and the value of the US dollar must surely follow lower bond yields (in a lagged fashion).

The Fed meets this week on Thursday morning (6am NZT) and a further 0.75% increase in its interest rate to 2.50% is already priced into the market. US GDP growth data for Friday morning July 29 for the June quarter is expected to reach an annual growth rate of between 0.40% and 0.60%. A lower-than-expected actual number, or a negative number, would cause the value of the US dollar to fall sharply as the need for further increases in US interest rates to reduce inflation fades. US employment data for July on Friday August 5 will also be a key indicator for the markets. The consensus forecast calls for a lower increase of 260,000 after the better than expected increase of 372,000 in June.

The direction of the NZD/USD exchange rate continues to be completely dominated by the USD side of the equation. Not even a 5% drop in dairy prices last week prevented the Kiwi Dollar from advancing to 0.6250 as the AUD saw gains and the USD weakened in global currency markets .

Burgernomics and purchasing power parity theory

The Big Mac Index was invented by The Economist magazine in 1986 as a light guide to whether currencies are at their “correct” level. It is based on purchasing power parity (PPP) theory, the idea that over the long term exchange rates should approach the rate that would equalize the prices of an identical basket of goods (the Big Burger Mac was chosen) in any country. two countries. It’s not precise; however, it is a standard measurement that is better than most.

According to The Economist, a Big Mac burger costs NZ$7.10 in New Zealand and US$5.15 in the United States. The implied exchange rate is therefore 0.7250. The current NZD/USD market rate is 0.6250, so the Kiwi Dollar is 14% undervalued against the USD. The Australian dollar is undervalued by 10.2% and the euro by 7.5%. The Swiss franc is overvalued by 30.3% (a Big Mac costs 6.50 SFr in Zurich) and, at the other end of the scale, the Venezuelan bolivar is undervalued by 66%.

Another drop in stocks remains as Kiwi dollar risk

Strong sell-offs in US equities in April and again in early June hit the Kiwi Dollar hard (circled areas in chart below) as investor risk aversion sentiment pushed hedge funds to sell stocks. risk-sensitive currencies (NZD and AUD). Stocks have rallied in recent days as US corporate earnings have yet to be affected by the slowing economy. The sudden reduction in yields on risk-free US Treasury bonds to 2.75% was more favorable news for tech stocks which sold off when bond yields rose sharply in April and June.

The close correlation between the Dow Jones index and the NZD/USD exchange rate cannot be ignored. Some market commentators are suggesting that stock markets could fall another 10% on top of the Dow Jones’ 20% plunge from 37,000 in January to a low of 30,000 a few weeks ago. If that were to happen, the Kiwi Dollar would be vulnerable to further selling. However, given the greater likelihood of the Fed pivoting sooner than most think on a weaker US economy and lower oil prices (now at US$95 a barrel), the likelihood of another selloff stock market massiveness seems to be shrinking. Even a modest rally in the Dow Jones Industrial Average from 32,000 to 34,000 would propel the Kiwi Dollar higher to 0.6800.

The NZD/USD rate at 0.6250 has now broken decisively higher to sit above the downtrend line it has been trading below since 0.7000 in late March (black line in the chart below). below). Our forward view remains unchanged, the NZD will follow the AUD higher over the next few months.

USD importers should be at minimum hedged levels and USD exporters continue to hold maximums replacing all maturing hedges. USD exporters facing bank credit constraints because existing hedges are in an unrealized loss position on mark-to-market revaluations are advised to purchase NZD call options (which do not use bank credit). Buying NZD call options with strike rates two cents above the spot of 0.6250 (i.e. 0.6450) has an indicative cost of 80 trading points .

Select chart tabs



*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has been writing commentaries on the New Zealand dollar since 1981.

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China wants to be No. 1 in areas other than population https://kenttribune.com/china-wants-to-be-no-1-in-areas-other-than-population/ Thu, 21 Jul 2022 16:30:00 +0000 https://kenttribune.com/china-wants-to-be-no-1-in-areas-other-than-population/ Indians will soon outnumber Chinese, threatening Beijing’s sense of superiority, writes Rana Mitter.

Last week, the United Nations World Population Project announced a major change in the way the world looks.

Next year, India, not China, will be the most populous country in the world. Currently, China has 1.43 billion people compared to India’s 1.41 billion, but by mid-century there will be over 1.6 billion Indians compared to about 1 .3 billion Chinese.

At one level, this development should delight Beijing, which has forced its population to a “one-child” policy for forty years.

Still, there may be some sorry faces in Beijing. The idea that China is the most populous society in the world has long been linked to the rise of the country.

Officially, China rejects any idea that being at the top of the world rankings matters: in January this year, Vice Foreign Minister Le Yucheng said that China had no interest in becoming the biggest economy or superpower. of the world and that she would instead work to improve the lives of her people. at home.

Yet for years, Chinese social media has been overflowing with dissenting voices demanding the country be “No. 1”. The drop to No. 2 in the world’s population is likely to cause some soul-searching in this quest for the other world’s top spot.

Despite these denials from its leaders, there is no doubt that China is aiming to become the largest economy in the world, and by some measures such as purchasing power parity, it already is. In terms of nominal GDP, it’s still No. 2 in the United States, but many economists suggest it’s likely to peak by the end of the 2020s (although unexpected factors such as the economic effects of quarantines of Covid could get in the way).

The quest for GDP growth is part of a larger project to take the lead in a range of areas. During the 1980s and 1990s, Chinese policymakers responded to challenges from Supreme Leader Deng Xiaoping to build a model that followed a concept they called “overall national power” (zonghe guoli). Much of the assessment began within the military, with armament and training assessments, but attention soon turned to economic factors.

Deng’s analysts categorized existing resources such as labor and material and mineral resources, as well as projecting future capacity in areas such as new technologies.

During the 1990s, scholars debated China’s rise in world rankings. However, in the 2000s, ambitions changed: instead of “overall national power”, Chinese analysts began to speak of an increase in China’s “soft power” – the ability of states to rule other states. by persuasion rather than coercion.

For much of the period since 1945, the United States has been the undisputed number 1 in this field. Despite numerous geopolitical disasters (Vietnam, Iraq) and national injustices (racial politics), the ability of the United States to project a sense of itself to the world has been and remains immensely strong. There’s a reason Xi Jinping was just one of many Chinese parents who sent his daughter to study in the United States.

China has deployed immense resources in an attempt to transform itself into a soft power superpower over the past two decades. The effort has had some success, particularly in the Global South: the idea of ​​China as an awe-inspiring technological innovator has taken hold in large parts of sub-Saharan Africa and Latin America, where the efficient and cheap delivery of 5G has taken precedence over fears about security. Multi-part Chinese dramas and soap operas have become popular across Southeast Asia and have started to develop an audience in some African countries: Last year, social media users in Kenya became big fans of the great Chinese fantasy television series. The Untamed. TikTok, a product of Chinese company ByteDance, has been a cultural game-changer, though part of its success stems from downplaying its ties to its home country.

Even India, a country generally suspicious of China’s geopolitical intentions, regularly sees anguished debates over why it cannot match China’s GDP and poverty reduction record. Nor can it match the audience China has for its story of its rise to global power.

Yet overall, China’s desire to become the top producer of soft energy has stalled, with the country still ranking far behind the United States. One reason is the top-down control that shapes Chinese policy in the country.

The strongest soft power generators in the Chinese neighborhood, such as Japanese manga and South Korean pop, emerged when their countries liberalized and developed a civil society.

China has moved in exactly the opposite direction in recent years; for example, restrictions imposed on Hong Kong under China’s 2020 national security law have increased censorship of films, along with warnings that museums in the city should avoid works of art that could harm to a vaguely defined national security.

This restrictive mindset at home is a self-imposed obstacle to China’s desire to project its cultural power into the liberal world.

Moreover, China also sends confusing vibes about the actual accessibility of its own culture and society.

His government argues that foreigners cannot criticize his policies because he operates under a unique system of “socialism with Chinese characteristics” that would not suit any other state, but also projects the idea of ​​”wisdom China” which can act as a resource for the world.

The soft power of the United States stems from the idea that anyone, in theory, can become an American by adhering to its culture and its values.

China struggled to make a similar, consistent claim and hampered its own narrative as a result. Despite spending hundreds of millions to boost its position in the global soft power rankings, China hovers between 8 and 10.

It’s still unclear what it means for China to be No. 1: GDP alone doesn’t reflect the sense of aspiration behind the idea. But as it slips into No. 2 in terms of population size, there is no doubt that its leaders will devote even more attention to achieving this elusive and ill-defined goal in the areas they still feel they can control.

– Rana Mitter is Professor of Modern Chinese History and Politics at Oxford University.

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Peter Schiff: A Tale of Two Dollars https://kenttribune.com/peter-schiff-a-tale-of-two-dollars/ Mon, 18 Jul 2022 12:42:06 +0000 https://kenttribune.com/peter-schiff-a-tale-of-two-dollars/
by SchiffGold 0 3

The dollar has been on a tear in recent months. Just last week, the dollar index rose from 107 to 108 with an inter-week high of 109.3. The greenback also reached parity with the euro last week. The dollar is near a 20-year high against the European currency and a 24-year high against the Japanese yen.

And yet, we are witnessing a massive devaluation of the dollar at the national level. In his podcast, Peter tries to make sense of this two dollar story.

You can see the impact of the strong dollar on import and export prices.

Export prices rose 0.7% on the month and are up 18.2% on the year, double the consumer price index. Peter noted that import prices better reflect the prices paid by consumers for domestically produced goods than the CPI of 9.1%.

It is a real number, unlike the CPI which is a completely made up and invented number where you have a formula which is reverse engineered to come out with a lower number.

On the other hand, import prices are much lower thanks to the strength of the dollar. Nevertheless, even with the strong dollar, import prices are still up 10.7% year-on-year.

It’s because the dollar is so strong that import prices only rose 10.7% for the year. Because if the dollar wasn’t so strong, import prices would have risen much more than that and that would have passed through to the CPI. So, but for the strong dollar, we would have much higher inflation numbers than what we’re dealing with.

The situation is reversed abroad. Europeans and Japanese pay much more for the products they import from the United States.

So their weak currencies exacerbate their inflation problem, while our strong currency alleviates our inflation problem.

Peter said the overall dynamic didn’t make sense. The United States has the highest inflation in 40 years, yet it also has the strongest dollar in 20 years. How is it possible ?

How can the dollar be so weak and yet so strong at the same time?

THE DYNAMIC

In short, inflation is the loss of purchasing power of a currency.

If our currency buys less, it means the currency is weakening. It loses value. We need more and more dollars to buy the same amount of goods and services.

If the government gave everyone $1 million, we wouldn’t be richer in absolute terms. The limiting factor is not money. The government can print money at will. The limiting factor is always the availability of goods and services.

If the government sends everyone a check for $1 million, but the factories don’t produce more products than before, if the service providers don’t provide more services than before, what -he ? Well, the only thing that can happen is that prices have to go up for Americans to end up buying the same amount of goods and services. They just pay $1 million more to buy them because every dollar they have is worth less. This is basic supply and demand. As the supply of something increases, the demand being equal, the value of that thing must fall. So if you double or triple the supply of dollars, the value of each dollar will lose proportional value.

This is what is happening in the United States. It’s not so much that the prices go up. The value of the dollar is falling. There are trillions more dollars in the economy than a few years ago, and as a result, the value of each dollar is decreasing.

But as the dollar loses value, it hasn’t been this strong in decades. It increases in value against other currencies.

It’s the dichotomy. It’s a two dollar story. You have the domestic dollar which is weak and losing value. And then you have this international dollar which is strong and rising in value.

The strength of the international dollar helps the Americans somewhat, but the national weakness exceeds this international strength.

The question remains: why is the dollar so strong internationally when it is so weak domestically?

During the inflationary period of the 1970s, the dollar was destroyed. It only started to rebound when Paul Volker took the fight against inflation seriously.

If you look at everything from a fundamental perspective, inflation today should weigh even more heavily on the value of the dollar against other currencies than it did in the 1970s. the opposite is happening. Inflation is becoming a boon for the dollar. The weaker the dollar in America, the stronger it becomes abroad.

Why is that? Where does all the demand for dollars come from? Foreigners don’t need dollars to buy American products. The United States has a huge trade deficit.

The demand comes from speculators.

Currently, the dollar acts as an inflation hedge for everyone outside of the United States. It is not an inflation hedge in the United States. You cannot buy the dollar to hedge inflation if you are an American living in the United States because there is no hedge. The dollar is losing value. … This is not the dynamic that the Europeans, or the Japanese, are looking for. From their perspective, returns in the US are very positive because they are looking at the appreciation of the US dollar.

Keep in mind that inflation is a global problem. All the central banks in the world have increased their money supply. For people outside the United States, the dollar looks like a solution to this problem. As the old saying goes, it’s the cleanest dirty shirt in the basket.

There is also a self-perpetuating dynamic in play. As foreigners buy dollars to hedge their currency’s inflation, the dollar rises, reinforcing the idea that it is a hedge against the inflation. This craves more purchases.

But Peter said none of that basically made sense.

The dollar is rising according to the biggest fool theory. Why do people buy dollars? Not because they need it to buy American products. They buy them because they think a bigger fool is going to pay a higher price for their dollars in the future. … It can only go so long until the bubble finally bursts. And that’s what’s going to happen to this dollar bubble. Because that’s it. It’s a huge, strengthening bubble where people are buying the dollar because it’s going up. And because it goes up, people buy it.

At some point, people will start selling dollars to get their own currencies back. So what?

Peter said this is the main reason the world is not rushing to gold. Right now, the dollar looks like a much better alternative to gold.

Right now the dollar is stealing the shine from gold. For a while everyone wanted bitcoin instead of gold. But now it’s the dollar that everyone wants instead of gold. Eventually people are going to realize they don’t want the dollar, just as many of them have realized they don’t want bitcoin. Eventually there will be a gold rush. As I said, gold will be the last safe haven because it is the only true safe haven.

In this podcast, Peter also discusses that inflation is not due to “expectations”, the politics of inflation, and he explains why investors who shelter in dollars abroad will wake up brutally.

Report of purchase of gold and silver without tax

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No longer the most populous country, but China still wants to be world number one | Rana Mitter https://kenttribune.com/no-longer-the-most-populous-country-but-china-still-wants-to-be-world-number-one-rana-mitter/ Sun, 17 Jul 2022 11:48:00 +0000 https://kenttribune.com/no-longer-the-most-populous-country-but-china-still-wants-to-be-world-number-one-rana-mitter/

LLast week, the UN’s World Population Project announced a major change in the way the world looks. Next year, India, not China, will be the most populous country in the world. Currently, China has 1.43 billion people compared to India’s 1.41 billion, but by mid-century there will be over 1.6 billion Indians compared to about 1 .3 billion Chinese.

At one level, this development should delight Beijing, which has forced its population to a “one-child” policy for forty years. Still, there may be some sorry faces in Beijing. The idea that China is the most populous society in the world has long been linked to the ascend. Officially, China rejects any idea that being at the top of the world rankings matters: in January this year, Vice Foreign Minister Le Yucheng said that China had no interest in becoming the biggest economy or superpower. of the world and that she would instead work to improve the lives of her people at home.

Yet for years, Chinese social media has been overflowing with dissenting voices demanding the country be “No. 1”. The drop to No. 2 in the world’s population is likely to cause some soul-searching in this quest for the other world’s top spot.

Despite these denials from its leaders, there is no doubt that China is aiming to become the largest economy in the world, and by some measures such as purchasing power parity, it already is. In terms of nominal GDP, it’s still No. 2 in the United States, but many economists suggest it’s likely to peak by the end of the 2020s (although unexpected factors such as the economic effects of quarantines of Covid could get in the way).

The quest for GDP growth is part of a larger project to take the lead in a range of areas. During the 1980s and 1990s, Chinese policymakers responded to challenges from the Supreme Leader, Deng Xiaoping, to build a model that followed a concept they called “comprehensive national power” (zonghe guoli). Much of the assessment began within the military, with armament and training assessments, but attention soon turned to economic factors. Deng’s analysts have categorized its existing resources such as manpower and material and mineral resources, as well as projecting future capacity in areas such as new technologies.

During the 1990s, scholars debated China’s rise in world rankings. However, in the 2000s, ambitions changed: instead of “overall national power”, Chinese analysts began to speak of an increase in China’s “soft power” – the ability of states to rule other states. by persuasion rather than coercion.

For much of the period since 1945, the United States has been the undisputed number 1 in this field. Despite numerous geopolitical disasters (Vietnam, Iraq) and national injustices (racial politics), the ability of the United States to project a sense of itself to the world has been – and remains – immensely strong. There’s a reason Xi Jinping was just one of many Chinese parents who sent his daughter to study in the United States.

China has deployed immense resources in an attempt to transform itself into a soft power superpower over the past two decades. The effort has had some success, particularly in the Global South: the idea of ​​China as an awe-inspiring technological innovator has taken hold in large parts of sub-Saharan Africa and Latin America, where the efficient and cheap delivery of 5G has taken precedence over fears about security. Multi-part Chinese dramas and soap operas have become popular across Southeast Asia and have started to develop an audience in some African countries: Last year, social media users in Kenya became big fans of the great Chinese fantasy television series. The Indomitable. TikTok, a product of Chinese company ByteDance, has been a cultural game-changer, though part of its success stems from downplaying its ties to its home country.

Even India, a country generally suspicious of China’s geopolitical intentions, regularly sees anguished debates over why it cannot match China’s GDP and poverty reduction record. Nor can it match the audience China has for its story of its rise to global power.

Yet overall, China’s desire to become the top producer of soft energy has stalled, still ranking far behind the United States. One reason is the top-down control that shapes Chinese policy in the country. The strongest soft power generators in the Chinese neighborhood, such as Japanese manga and South Korean pop, emerged when their countries liberalized and developed a civil society. China has moved in exactly the opposite direction in recent years; for example, restrictions imposed on Hong Kong under China’s 2020 national security law have increased censorship of films, along with warnings that museums in the city should avoid works of art that could harm to a vaguely defined national security.

This restrictive mindset at home is a self-imposed obstacle to China’s desire to project its cultural power into the liberal world.

Moreover, China also sends confusing vibes about the actual accessibility of its own culture and society. His government maintains that foreigners cannot criticize his policies because he operates under a unique system of “socialism with Chinese characteristics” that would not suit any other state, but also projects the idea of ​​”wisdom Chinese” which can act as a resource for the world.

America’s soft power stems from the idea that anyone – in theory – can become an American by adhering to their culture and values. China struggled to make a similar, consistent claim and hampered its own narrative as a result. Despite spending hundreds of millions to boost its position in the global soft power rankings, China hovers between 8 and 10.

It’s still unclear what it means for China to be No. 1: GDP alone doesn’t reflect the sense of aspiration behind the idea. But as it slips into No. 2 in terms of population size, there is no doubt that its leaders will devote even more attention to achieving this elusive and ill-defined goal in the areas they still feel they can control.

Rana Mitter is Professor of Modern Chinese History and Politics at Oxford University

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US dollar exchange rate and inflation: what’s next? https://kenttribune.com/us-dollar-exchange-rate-and-inflation-whats-next/ Thu, 14 Jul 2022 17:43:45 +0000 https://kenttribune.com/us-dollar-exchange-rate-and-inflation-whats-next/

The USD made quite a turn, which kept inflation from climbing even higher. But that may not last long.

By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.

The US dollar has had a hell of a ride since it became clear that the Federal Reserve would eventually have to start tightening its reserves because inflation was starting to rage.

This inflation was starting to rage became clear in February 2021. The Federal Reserve, at least in public, called it transient, and they came up with all sorts of bogus reasons why it was just a blip.

But I was screaming about inflation back then, and explaining why it wasn’t transitory, and why it wasn’t a hit, and a lot of people were shouting about it and explaining why it wasn’t. was not transient, and some corners of the markets knew it was not transient. And we who were crying inflation at the time, we all knew that the Fed would eventually suppress inflation, should suppress inflation, and it would do so by tightening monetary policy. It would end its asset purchases, it would raise interest rates and it would start quantitative tightening.

And the forex markets knew it too.

In February 2021 – that infamous February when many of the shittiest stocks peaked and then crashed 80% or 90% – in February 2021 the US dollar turned around against the major currencies which trade freely, including the euro and the yen.

At the time, so in February 2021, it took $1.20 to buy €1. Since then, the dollar has soared against the euro. On Friday morning, it took almost exactly $1 to buy €1. The last time this “parity” happened was in 2002.

The dollar also surged against the Japanese yen. On Friday, it took more than ¥136 to buy a dollar. The exchange rate has been around 136 since the end of June. You have to go back to the late 1990s to find these exchange rates.

The Federal Reserve maintains a broad dollar index that includes the currencies of the United States’ 22 major trading partners, so not only the euro and the yen, but also the Chinese renminbi, Mexican peso, Hong Kong dollar, Canadian dollar, Brazilian real, Thai bain, etc. 22 of them.

For this broad dollar index, currencies are weighted by the volume of trade with the United States. And there is an inflation-adjusted version of this broad dollar index, the so-called “Real Broad Dollar Index”. This index dates back to 2006, and by the end of June it had reached its highest level since the start of the index. Since February 2021, it has gained almost 11%.

The sharp rise in the dollar since February last year has had a significant impact on inflation because we have had a huge goods trade deficit with the rest of the world. This trade deficit reached a record level in the first quarter of this year.

Import prices also rose, but the strength of the dollar dampened the surge in import prices. In the Eurozone and Japan, their battered currencies pushed up import prices even more than in the United States.

Thus, the strength of the dollar helped to contain galloping inflation in the United States. This raging inflation, which has been above 8% for the past few months according to the consumer price index, would have been higher if the dollar had not gained so much strength since February 2021, when this raging inflation began.

The E. and components, electronics, industrial products, home appliances… you name it.

For example, Boeing’s troubled 787 Dreamliner is assembled in the United States, but many parts and components are manufactured in countries around the world and are imported. Automakers that assemble vehicles in the United States import many components from other countries. This is in addition to the large volume of high value-added finished products that are imported.

That’s how the United States gets to have this huge gigantic trade deficit – and those goods are paid for in dollars, and when the dollar strengthens, that lessens the impact of the price increases that are now reverberating around the world .

The exchange rate, like the dollar against the euro, is the result of market action in the broad currency market. Currencies are traded against each other, and there is an enormous amount of speculation going on, including with currency derivatives and hedging, from retail day-traders to gigantic trading houses. Thus, exchange rates fluctuate from second to second.

Then there’s a separate action that impacts currencies and anything denominated in those currencies, and that’s inflation. Inflation reduces the purchasing power of that currency in its own country. The purchasing power of the dollar in the United States has been shaken by this galloping inflation. Everyone knows what that means: you have to pay more money for the goods and services you buy.

These two dynamics – exchange rates and the purchasing power of currencies in their own country – do not necessarily move in the same direction in the short term. Exchange rates are determined by trading in the massive currency market. Inflation has other causes.

So why has the dollar soared against the euro and the yen when there is so much inflation in the United States?

First, there is now about the same runaway inflation in the Eurozone as in the United States, and in some Eurozone member states inflation is much worse, in double digits, and in a few cases, that’s over 20%, which is a horrible number. And even in Japan, inflation is taking off.

And second, the Fed has been on a tightening path since the start of this year – and now on a fairly aggressive path, with 75 basis point rate hikes and quantitative tightening. But the European Central Bank and the Bank of Japan still maintain negative interest rates.

The ECB will kick off the tightening with the first rate hike this month and a bigger rate hike in September, and with QT. Some ECB governors are now talking about an aggressive rate hike in September. One of them just said that the ECB should increase by a point and a quarter in September to deal with this galloping inflation in the euro zone. Which would be huge.

The Bank of Japan has so far pledged not to tighten policy, but that too could change if the yen continues to fall. Japan already has a large trade deficit, partly due to the fall of the yen, which makes imports much more expensive, and Japan imports a huge amount of energy products, food products, other materials and many components. , and finished goods, including consumer electronics, and all sorts of things.

So central bank tightening usually supports the currency’s exchange rate, and the Fed got there long before the ECB got there, and the Bank of Japan is still stuck in its old ways.

The Bank of Japan may eventually be forced to follow. Every other major U.S. trading partner except China has already embarked on rate hikes, and massive rate hikes in some cases, such as Brazil.

And this tightening drama in other countries will eventually impact exchange rates, and the dollar could then reverse and lose ground again.

Hedge fund manager Stanley Druckenmiller said about a month ago that early Fed tightening had boosted the dollar, but there was nothing out of the ordinary in the US economy, and he added: “I would be surprised if, over the next six months, I wouldn’t be short the dollar.

The dollar is trading at extremely high levels. And historically, when it traded at precariously high levels against other major currencies, it was knocked down. And sometimes a lot.

And it might happen again at some point, maybe not tomorrow, or in July or August, but it might happen as the ECB starts trying to catch up with the Fed.

There would be nothing special for the dollar to return to the middle of the 20-year trading range against major currencies. He has already done it. And in the past, it exceeded on the way down.

And if the dollar’s exchange rate returns to the middle of the range, or lower, then something else will automatically happen: it will remove the lid that the strong dollar had put on inflation.

A weaker dollar will fuel inflation in the United States via import prices, especially finished goods and high-value components. And just when durable goods inflation might come down, then there will be this new added fuel – a weaker dollar.

The exchange rate has a delayed impact on the prices of imported goods. Many of these prices are traded in dollars months in advance, so a weaker dollar would only gradually fuel consumer price inflation in the United States, and that could happen later this year. , then more intensely next year. Just when people expect durable goods inflation to somehow run out of steam, there would suddenly be additional fuel for more inflation.

This runaway inflation is unlikely to drop quickly below 5%, now that inflation has firmly entrenched itself in services, where nearly two-thirds of consumer spending ends up. These year-over-year CPI rates fluctuate, they always fluctuate, and sometimes by a lot, but just when they seem to be getting back into the acceptable range, they start to rise again.

And we’re going to see some of that, we’re going to see CPI rates go down a bit and then they’ll come back up, and there’s going to be a lot of reasons for that, but part of the resurgence will be due to the dollar as it loses ground against other major currencies.

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Reviews | The dollar strengthened while the euro lost ground https://kenttribune.com/reviews-the-dollar-strengthened-while-the-euro-lost-ground/ Wed, 13 Jul 2022 20:00:06 +0000 https://kenttribune.com/reviews-the-dollar-strengthened-while-the-euro-lost-ground/

A $1 bill and a one euro coin are worth almost exactly the same amount, for the first time in 20 years. The euro has been trading above the dollar since 2002, but according to price sources tracked by Bloomberg, on Wednesday the euro, used by 19 countries, briefly fell below the dollar, hitting a low of $0.9998 before bouncing back to $1.003 in afternoon trading in London. The dollar strengthened against a wide range of currencies while the euro lost ground, especially against the dollar.