atans1

Fed is the real hegemon/ How Chinese problems impact the US

In China on 21/09/2015 at 1:07 pm

Officials in China and Indonesia criticised the Fed for keeping the world guessing about its next move after it delayed raising rates.

Fed juz showing China that it’s the world’s hegemon just before Xi visits the US:

NYT Dealbook reported that the Fed stressed that it needs a little more reassurance from the United States economy and “What we can’t know for sure is how much concerns about the global economic outlook are drivers of those developments,”

Janet L. Yellen, the Fed’s chairwoman, took care to point out that the Fed was not just responding to a few rough weeks for the stock market, Neil Irwin writes in The Upshot. It needs a little more reassurance from the United States economy. “What we can’t know for sure is how much concerns about the global economic outlook are drivers of those developments,” she said.

The challenge now is that 2015 may end without providing answers to the questions that the policy committee has. It can take many months for financial swings to ripple through the economy.

Stanley Fischer, the Fed vice chairman, said last month that if the Fed waits until it is absolutely certain it is time to raise rates, it will probably be too late. Fed officials will still have to make a decision based on their own forecasts, rather than hard evidence.

This is also from NYT Dealbook (some time) back explaining why problems in China affect the US.

FAULT LINES REACH THE U.S. ECONOMYAs investors scramble to make sense of these swings, financial experts said there have been signs of an equity crisis for more than a year now, Landon Thomas Jr. reports in DealBook. They argue that the United States would only be able to avoid for so long the deflationary forces that have taken root in China.

More and more analysts now see the problems in China and other markets as a real threat to the United States economy. The fears about the economy have some investors betting that the Federal Reserve will not raise rates this year, though that may well be premature, as Binyamin Appelbaum reports.

“The global G.D.P. pie is shrinking,” said Raoul Pal, who produces a monthly financial report catered to hedge funds and other sophisticated investors. The most crucial indicator, in his view, has been the surge of the dollar against emerging market currencies.

Historically, the party has ended when the dollar takes off against emerging market currencies, as it did in Latin American in the 1980s and Southeast Asia in the 1990s. Suddenly, loans in relatively cheap dollars that financed real estate and consumption booms were no longer available and theultimate result was always a growth slowdown.

Through the year ending on Aug. 19, some of the worst-performing investments in dollar terms were Brazilian equities, Russian bonds, Indonesian equities, and Turkish equities.

During the same period, United States equities returned 8.7 percent – the fourth best return delivered by any major class of assets. In effect,investors in the United States miscalculated, thinking that what happened in Russia, Turkey and Indonesia need not have any effect on stocks of companies based in the United States. The slowdown in China was driving weakness in these countries, as it bought less steel from Brazil, less mineral fuel and oil from Indonesia.

Albert Edwards, a strategist at Société Générale in London, said the government’s naked support of the stock market bubble was a clear sign for him. “One you encourage an equity bubble, it will collapse – and then you are really in trouble,” Mr. Edwards said. “This is utter madness.”

For Jeffrey Sherman, a portfolio manager at the bond investment firm DoubleLine, the correction in the high-yield corporate bond market was an alarm bell. In summer 2014, as stocks of United States companies continued to push upward, the yields on risky corporations started to spike. The fact that these bonds were entering their own bear market should have been seen by equity investors as a warning sign, Mr. Sherman said.

David A. Stockman, a former budget director under Ronald Reagan, has spent the last three years closely examining the excesses of the Chinese investment boom and warning of their consequences. He points out that in the late 1990s, China had the capacity to manufacture 100 million tons of steel. That figure today is 1.1 billion tons – almost twice the amount of annual demand for steel in China.

This steelmaking boom sent the price for iron ore shooting up. Like all commodity prices, it has fallen sharply, a correction that creates problems for iron ore-producing countries like Australia, which made huge investments to keep supplying these raw materials to China.

The bottom line though, is that investors in American stocks recognized too late in the game that a global contraction was sneaking up on them, Mr. Thomas writes.

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