While there has been positive economic activity in Asia, Brazil and other markets such as Australia, the picture in Europe and the U.S. remains in sharp contrast. Economic activity is comparable moderate in both regions but the strategies to improve the situation are quite different. While an increasing number of European states have implemented aggressive spending cuts, the U.S. is trying to improve economic sentiment with controlled government spending, a more aggressive monetary policy and more government involvement. In Europe the rather aggressive spending cuts are already starting to impact GDP growth and the impact in 2011 looks like it might be even stronger. Portugal, for example, is expecting economic growth below 0.5% and we feel that this might even turn into a slightly negative number. Export oriented economies like Germany are doing better with GDP growth expected to be in the area of 1.5% next year; possibly even slightly above that number. It is therefore understandable that countries like Japan and the United States have no real interest in a strong currency, since that would decrease exports. While Japan has been an export country for decades, the situation with the U.S. is different. A weaker U.S. Dollar will not have such a strong impact on exports and will therefore be less beneficial when trying to improve GDP growth. In terms of deficits, Japan is probably in even worse shape than the U.S. The main advantage that Japan has, however, is that its people have huge private savings and typically a lot less leverage.
A high level of savings is on one hand a problem, Japanese consumption has been weak for a long time already, but the vast amounts of savings is acting as a backstop for the Yen. With the U.S. Dollar, things are much worse since private savings are relatively low and typically people have a lot more leverage. We believe that the deleveraging (reducing debt and consumptions) that has recently started could continue for years and the housing market, as one example, might stay at depressed levels for quiet some time to come. The government can only do so much to improve the situation and we are skeptical about government spending that only promotes consumption. In this context some of the proposed spending plans by the current administration are understandable from an economical point of view. The problem is that the amount of debt is already at such elevated levels that it is very difficult to find the political backing for additional investments. Did you note the subtle difference here, I am saying investments NOT spending; that is an important difference. Infrastructure related investments, which tend to create true economic value would be especially important. Measures that just aim to promote simple spending or temporarily cut taxes will only have a positive impact short-term. The problem is that the current administration does not seem to have enough backing to pursue some of its plans and the mid-term elections are expected to bring a big shift in political power. However, the problems in the United States as well as in Europe are deeper. The reason why both have lately seen their currencies weakening significantly can’t only be attributed to the debt problem. We are much more worried about the loss of fundamental trust in these economies and a tendency to correct failures of the past by implementing more and more regulation. In this context, we also need to rethink what makes a country and ultimately a currency strong, it goes far beyond monetary policy and gold backing. The value of a currency is a dynamic measure based on a number of factors that include economical and political factors. The ever increasing amount of laws and regulations has just made it a lot harder and less attractive for businesses and entrepreneurs to take risk and make investments that would spur real economic activity. That is the reason why the degree of regulation in developed economies tends to correlate negatively with its economic competitiveness. So while it would be very critical to deregulate markets and providing people with the right incentive to produce, the common answer to economic problems has been more regulation and laws in order to regulate the economy back to some perception of sanity. It is more likely leading to insanity.
Disclosure: "No positions"