In turn, this will help to ease global trade imbalances, ward off the threat of trade protectionism, alleviate domestic credit strains and inflation pressures and accelerate the Chinese shift from export-led to consumer-led growth. It also suggests that the Chinese authorities have confidence over the sustainability of the global recovery.
Rough estimates show that every 5% yuan appreciation trims the U.S. trade deficit by just over $60 billion (so it would take something like a 35% appreciation to eliminate the gap altogether – call us in 2020).
The Chinese move has ignited a rally in risk assets to start off the week -- a rally of sizeable proportions. Global equities are riding a 10-day winning streak, the longest in eleven months, led by a 2.8% jump in the MSCI Asia-Pac index. These countries, along with several Latin American nations that compete with China are winners here. Emerging markets soared 2.5% and up nearly 10% from the lows of two-weeks ago (Chinese banks and property shares ripped overnight). European marts are now up for a ninth consecutive day -- also the longest in 11 months.
Gold has hit a new all-time high this morning (the news that Saudi gold reserves are twice as much as previously estimated is adding a further thrust to bullion this morning) and both oil and copper are bid as these hard assets priced in U.S. dollars gain ground from the resulting decline in the greenback. The once-parabolic chart of the DXY has reversed course and is now about to test the 50-day moving average of 84.7 for the first time in three months.
Meanwhile, the safe haven of government bonds has lots of allure as long-term yields back up in response and offer up another opportunity for Treasury bulls to re-load. CDS spreads are also plunging as investors turn their attention away from the global debt challenges, which most assuredly have not gone away just because of improved Chinese FX flexibility. The view that China will be “recycling” fewer dollars is a tad strange because if the U.S. current account deficit shrinks, as it should, then we are not going to need funding in any event.
HOW “GREAT” WAS THE RECESSION? From Stephen J. Huxley, Ph.D., chief investment strategist, Asset Dedication
Most economists believe that the US economy appears to be in a recovery phase from the recession that officially began in December, 2007, according the National Bureau of Economic Research. Its Business Cycle Dating Committee makes the official call on the turning points for peaks and troughs in the economy. December, 2007, marked the end of an expansion that started in November, 2001 and lasted 73 months. The 1990’s expansion lasted 120 months.
While the official end of the recession has not yet been called, statistical indicators suggest that it probably reached the trough in the third quarter of 2009. Its severity and length have inspired Paul Volker to call it the “Great Recession,” suggesting it should be considered the little brother of the Great Depression.
Is this warranted? Is this recession all that much different from previous recessions?
The answer is yes, according to the American Institute of Economic Research, which tracks leading, coincident, and lagging business cycle indicators. They defend the title “Great” based on comparisons back to 1948, which includes 10 recessions, and cite four main reasons.
First, assuming it did end in June 2009, the 18-month peak to trough contraction of economic activity would be the longest since the Great Depression, which itself lasted 43 months. Previously, the longest post-war recessions were 16 months (Nov. 1973-March 1975 and also July 1981-Nov. 1982).
Second, the impact on employment has been much deeper. Nonagricultural employment, the ratio of employment to population, personal income less transfer payments, and the average duration of unemployment are all worse than any prior recession since the Great Depression.
Third, and perhaps the biggest factor, is the drop in overall net worth for the household sector. Hit by the stock market decline in 2008, and falling home prices in the US where 67 percent of the population owns its own home, private individuals suffered a loss of nearly $8 trillion, or 25 percent. This is far greater than any drop since the Great Depression. Even in the 1973-74 recession, considered the worst prior to now, net worth dropped by less than 10 percent. It is unprecedented drop in net worth that appears to have fed the malaise that seems to be hanging on even today in the economy.
The fourth factor cited by the AIER is the magnitude of the federal government’s response, which has pursued the most aggressive monetary and fiscal policies since the Great Depression, in both absolute and relative terms. The full consequences of these policies are yet to be known, as are the potential effects of pending legislation for financial industry reforms.
These four factors provide a compelling argument that 2007-2009 has earned its title as the Great Recession. It may be years before the ripple effects of government policies fully manifest themselves and no one can be sure how long the recovery will take to reach it next peak. In the 1973-74 recession, it took 30 months for most of the economic indicators to return to their pre-recession levels. How long it will take this time remains the “Great Question.”
