Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Saturday, May 19, 2007

China announced that they are widening the trading band for the RMB last week. That's a way of saying that they are going to let the dollar fall faster. As the Chinese are already accumulating far more dollars than they want, their choice is either to keep the accumulate more or let the dollar fall. I did a quick graph of each time the dollar dropped 5 fen (0.05 yuan) and the dollar has been faster lately:

In contrast, the dollar has been rising against the Yen over the past year:

I attribute the falling Yen almost entirely to a Yen carry trade that has gone completely out of control. When the market for high yielding, subprime mortgage backed securities (a favorite of carry traders) started to reflect the reality of the housing market back in February and March, the Yen strengthened initially but then came tumbling back down as carry traders increased the size of their bets. Against the Euro, the Yen's extreme recent weakness has been especially clear:

With the US bull market on it's last legs, the Dow Jones Industrial Average keeps making new highs. The recent strength of the large cap stocks relative to everything else suggests a desperate prop job:

The most successful hedge fund over the past two years continues to pile into stocks, and especially Dow stocks, the performance of the stocks they've chosen hasn't been good, but that doesn't really matter if the rising tide is lifting all boats and their leverage is high enough:

Renaissance is just one of hundreds of hedge funds borrowing Yen and buying up large cap stocks these days. As long as the game is working, they'll keep playing. Just don't expect it to go on forever.


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