As we come to the end of 2011 and arrive at what will be no doubt be called New Year’s Eve Eve, I thought that I would take Kylie Minogue’s advice to “Step Back in Time”. If I do so I see that the subject I returned too the most was that of the “Currency Twins”, the Swiss Franc and the Japanese Yen. The Swiss Franc was at 1.2433 versus the Euro and the Japanese Yen was at 81.5 versus the US dollar and 108 versus the Euro.
The total movement is misleading
If we now look at today’s levels we see that the Swiss Franc is at 1.2162 and one may be tempted to think, what is the big deal? However if we recall this from December 30th 2010 we are reminded that it is a big deal.
So we can see that Swiss exporters will be finding that it is ever harder to export as their currency becomes ever more competitive and that the Swiss economy will be subject to disinflationary influences as it rises against the US dollar and deflationary influences as it falls more generally.
Also as we recall the surge which at one point looked as if it might take the Swiss Franc to parity with the Euro, we are also reminded of the extraordinary effort the Swiss National Bank has made with its 1.20 floor (cap). With the uncertainties around as we enter 2012 they may well find that they have time to demonstrate exactly what they mean by “unlimited purchases” as the year develops.
Also having met over the Christmas season someone with a Hungarian sister in law who has just closed her Swiss Franc mortgage, I am not in a mood to forget the impact of the strength of it on borrowers in Eastern Europe. The only lightening of that mood I can manage is to point out that I was taking the advice of Jona Lewie.
You will still find him in the kitchen at parties
The Japanese Yen
As I type this the Yen is at 77.56 versus the US dollar and 100.21 versus the Euro. If we step back further in time to the beginning of 2010 we see that it was at 133 versus the Euro, so Japanese exporters are having a tough time. There has been a discussion in the comments section about Japan outsourcing some of her exporting capacity to other nations, and on current trends that seems likely to continue. There are a lot of implications here for Japan and the first two that come to mind are unemployment and government revenue. Also in a country where “face” is an important concept the failure of the Bank of Japan to cap the Yen’s rise – and if we recall it had concerted support after the tsunami- poses its own issue.
The US Dollar
If we look at the trade weighted dollar index we see that it ended last year at 79.8 and is now 80.54! Against the Euro it fell to 1.49 but is now 1.29 which compares to 1.32 this time last year. What we can say is that if it is the underlying policy of the US Federal Reserve to reduce the value of the US dollar then in 2011 it did not suceeed. It was all going so well in the spring (72.7)……
The most important measure in 2011 and 2012
US employment and unemployment
As the US Federal Reserve has as its main policy aim an increase in employment and a reduction in unemployment these measures are at the top of the economic pack, in my view. After the fall at the turn of 2011 in the unemployment rate from 9.4% to 9% the picture got much muddier. Indeed mirroring the performance of the US dollar things improved in the spring as the rate fell to 8.8% but then the trend reversed and rose to 9.2%.
We end the year with the latest figures for November showing a fall to 8.6% but unfortunately the detail of the figures showed falling participation rate and employment levels which took away around half of the improvement. So if you like we went back to March’s 8.8% once you allowed for that. Not inspiring is it?
Even worse if we look at the recent low for US unemployment which was 4.4% in December 2006, it will take a very long time to get anywhere near that level at current rates of progress. I am reminded of the human cost of this by the BBC’s World Service which is currently discussing the situation of an American who used to work for US $13 per hour and now cannot find a job at US $7 per hour.
Put another way in 2010 there were an average of 83.94 million Americans “not in the labor force” and this figure was rising as the number for November 2010 was 84.77 million. Well it is 86.55 million now…..
I see many pundits repeating the same optimism for 2012 that they had for 2011 when we were told that the US economy would grow by 3 to 4%. As it got nowhere near that you might think that they should be more cautious for 2012, even if you do not I certainly do! The US economy starts with some growth but unless something very favourable happens nothing like that sort of rate. Mind you if you look at the prospects for many parts of Europe, postive growth is something to be welcomed.
The danger for 2012: The world’s banks
The problem for economic growth in 2012 is the state of the world’s banking system. The European part of it is plainly creaking under the strain and is in real distress. One thing we did learn from 2008 and the Lehman’s/AIG debacle was that problems appear in unexpected places. Whilst policy makers seem to live in an alternate fantasy world where banks can simultaneously raise more capital and lend more we see falling bank share prices and likely deleveraging.
Put another way the European Central Bank did not decide to offer 3 year liquidity ( with a one-year get out option) totalling 489 billion Euros for something to do. Backing this up comes the US Federal Reserve which has now deployed some US $99.8 billion of US liquidity swaps for foreign banks. So after spending 2010 talking of exit strategies (from their extraordinary operations) we are now partying like it is 2008 in many ways and if anything entering new operations.
Something which troubles me in particular is the take-up of US $14 billion of liquidity swaps by the Bank of Japan. If you look at the performance of the Yen and Japan’s foreign exchange surplus they do not need dollars. It is when things are most illogical we should be most worried I think.
The European Central Bank has a marginal lending facility which is to banks what the naughty step is for children. It’s take-up was 17.3 billion Euros last night which is the highest since mid-2009. Overnight deposits at the ECB are now 445.7 billion Euros and are likely to rise again when we get the New Year numbers.
Bank of America
I have thought about a symbol of all this and it is the Bank of America share price and its battle, if I may put it like that to remain above US $5 per share. There is plenty of symbolism here from its name and the fact that Warren Buffett invested in it but if you want one symbol for the strength of the world banking system here it is and it closed last night at US $5.46.
Many analysts seem only to consider shares or equities and many of these have had a ropey year. For example yesterday’s rally did just enough to return the US S&P 500 index to positive territory and the Japanese Nikkei 225 has fallen 17%.
However some government bond markets have had a great year.
The longest dated UK gilt (government bond) rose from 97.88 to 124.6. None too shabby is it? And you would have made similar good returns in US Treasury Bonds.
For the Shaun investment strategy I am particularly pleased to report that the UK’s longest-dated index-linked gilt at the turn of last year ( 1.25% 2055) rose from 132.11 to 163.57 as of last night’s close. So my punt, excuse me, considered investment strategy, in this area worked out well although sadly not quite that well. The irony is that whilst I got a return for being correct (rising inflation was hardly unexpected here) there was an extra kicker from a general rise in gilt prices which I did not expect.
So let me sign off for everyone but those with strong stomachs by wishing everyone a Happy New Year, and for those with strong stomachs there is new economic news from Greece below.
The retail trade volume index, including automotive fuel, decreased by 10.8% in October 2011 compared with October 2010. The Index in October 2010 recorded a decrease of 8.1% compared with October 2009.
The overall volume index where 2005 is 100 is at 80.8.
As the Kaiser Chiefs put it.
And oh my God, I can’t believe it
I’ve never been this far away from home