Global trade is expected to decline in 2009, the first time since 1982, according to the World Trade Organization. However, instead of minimizing the impacts of the ongoing deterioration of the global economy, politicians are making it worst by implementing Buy American protectionist measures that can easily trigger a trade war.
Global trade fell by more than two thirds during the great depression. Did Politicians learn anything from that experience?
Recently, U.S. lawmakers approved a massive 787 billion dollar stimulus plan. With this spending bill President Barack Obama hopes to create more than 3.5 million jobs over the next two years and ignite spending by business and consumers alike. However, a Buy American clause included in the stimulus plan by the House of Representatives may well trigger a wave of protectionism in other countries and damage the potential benefits of the stimulus plan. In fact, a similar protectionist measure was approved during the last Great Depression of the 1930s when an unemployment rate of more than 23 percent hard-pressed U.S. politicians to implement a series of protectionist bills which ended up having a catastrophic impact in the world economy. Indeed, the Dow Jones Industrial Average crash of 1929 (chart below) is still remembered as the most destructive stock market crash in the history of the United States. However, judging by the amount of years the Great Depression lasted, one can easily see that the stock market crash was not a one day sell-off and politicians clearly failed to reform the system and boost the economy. In fact, Jude Wanniski, an economist, later correlated the initially swings in the stock market with the prospects for passage of the Smoot-Hawley Tariff Act. Back then the economy started rebounding with the advent of the Second World War. However, this time around, I hope we don't need to have a terrible war for politicians to wake up and start doing what is needed and not what is popular.
The Carry Trade Unwind May Be Over But High Yielding Currencies Can Fall Further
Over the past decade and until very recently, investors' demand for higher yielding assets drove up exchange rates for many exports dependent economies such as Australia, New Zealand and Canada. However, over the past 18 months, investor's appetite for high yielding currencies fell dramatically as shown by the table posted below which displays the 12-month percentage change of major currencies against the U.S. dollar. Now, the key question that many traders have is whether these commodity currencies are oversold or if we will see a sharp rebound. In my opinion, we are not close to the bottom yet, even though I admit that a sharp increase in exchange rate volatility makes it very difficult to make any type of forecast. My arguments are very simple and I have been talking about them over the past 6 months. First, investor's aversion towards risk-taking remains the main driver of price action in the currency market and I believe that will not change any time soon since we will see further losses on riskier assets like stocks and credit derivatives. Second, with the world economy slowing down (Real GDP Growth values posted below) is reasonable to think that the demand for commodities will also begin to dry up and export dependent countries like New Zealand, Australia and Canada could be very vulnerable going forward. Having said that, I expect more downward pressure in commodity currencies (AUD, NZD, and CAD) and I will be looking for opportunities to buy safe-haven currencies like the U.S. dollar, the Japanese yen and the Swiss franc.
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