In his latest report, ultra-gloomy SocGen analyst Albert Edwards warns of a trade war in 2010, especially if his views of a synchronised global downturn comes to pass.
I think the next 18 months will see major ructions in the financial markets. The consequences
of a double-dip back into recession next year require some lateral thinking. If the carry trade
unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be
doubly destructive to commodity prices. A surging dollar, coupled with China moving into
sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US
pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?
Investors seem to have spotted that the global economic cycle may be on the wane. The
ECRI leading indictor for US activity has now slid for five weeks in a row. Recent data such
as the slumping October US housing starts are causing very valid jitters of what will occur
as the turbo-charged fiscal stimulus now starts to abate.
— Having been in Asia for the last two weeks on business my thoughts turned to China.
President Obama’s recent visit there re-opened some uncomfortable issues about
increasing trade frictions in the context of a Chinese currency which most commentators
believe to be hugely undervalued and the US authorities believe to be “manipulated.”
— If we do indeed see the sort of unexpected 2010 synchronised global downturn I
— envisage, geo-political tensions are likely to increase sharply. And with trade barriers
already beginning to be erected in a recovery, investors should be really concerned about
what might unfold in any renewed global recession. Aggressive competitive devaluation and
a proliferation of trade barriers would become an increasing prospect in 2010.
— I show below one of my favourite charts of what world trade did in the 1930’s. Politicians
reassure us that they have learnt the lessons from that period. Unfortunately, all I see are
more and more protectionist measures being implemented, belying the soothing rhetoric.
Edwards also makes some interesting comments about China:
Our Asian Economist Glenn Maguire has been very right on China this year. I was chatting to
him on my recent visit to the region and he re-emphasised his call that China will be heading
into trade DEFICIT (!) throughout 2010. This is a mega-call and will have major
implications for the global financial markets. First and most obviously is that China will not
be accumulating FX reserves at anywhere near its recent pace. This has implications not just
for US treasuries etc., but also for the pace of Chinese growth itself, as the rise in reserves has
previously been a major stimulus to domestic monetary growth and activity (see chart below).
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