The manipulation of "The Dollar". A lesson for superpower administration.

One of the well known writers in the world of finance, argued that the recent outbreak of currency wars are the fault of the US. Now in this piece, I will put my best foot forward and try and analyse the situation. I am not brandishing my knife at anyone but am just putting down my 10 years of Global Markets understanding.

Lets talk about the most talked country's one of the most untalked topics.

Financially, the usage of Dollar has been executed with such perfection, so as to create a web where none of the economies can actually be detached from the green currency. Recently, it used one of its old tricks, Fed’s Quantitative Easing and other monetary growth programs create huge amounts of Dollars, and the majority of itto be exported to emerging market countries, like India in the form of loans and investments for development. The excess inflow puts upward pressure on their currencies, and the foreign speculators made speculative profit at the expense of domestic exporters. Obama's India visit would see some more of such plans being announced. Keep Watching...

The majority of newly printed money has indeed been shifted to emerging markets, where it enjoys one of the best returns and the highest potential for appreciation. The current economic and investing climate in the US is not as strong as in India. Indeed, this is why the (first) Quantitative Easing program was not very successful, and why the Fed has proposed a second round. While there is a bit of a chicken-and-egg story in the unvieling (does economic growth drive investing, or do investors drive economic growth?). US is harping these measures to propel growth in US,but if you watch minutely, the current capital flow trends suggest that any additional quantitative easing will also be felt primarily in emerging markets, rather than in the US.

While the ineffective of this measure is well-understood for the US investing community, a strong case is made for investing in emerging markets. Emerging market economies like (BRIC) are individually and collectively more robust, with faster growth and lower-debt than their industrialized counterparts in Europe and America.

The lucrativeness of these countries is driving speculative capital into emerging markets even though a critical currency appreciation of about 30% has already taken place and the asset bubbles that may be forming in their financial markets suggests that their assets and currencies are still undervalued. Please hold your horses, that does not mean the markets are perfect, but instead the speculators think that there is still money to be made in the situation. On the supply side, exchanges for the emerging market currency for Dollars (and Euros and Pounds and Yen) must necessarily accept the exchange rate they are offered. The rationale of the exchange rate is not decided from the fact that it is agreeable to all parties but because of the equilibrium it maintains in the demand and supply equation of world currency exchange.

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This occurrence unfairly penalizes the state of countries like India, whose economy is dependent on the export sector to drive growth. The situation actually proves that economies of the third world have no comparative advantage in the exports, they happen to produce and export. Low costs and loose laws are the only competitive advantage on which the third world countries should be dependent upon to grow their export sectors in spite of the currency appreciation phenomenon. Japan and Germany are an perfect example. They have recorded trade surpluses continuously for decades, in spite of the rising Euro and Yen for decades. But again you would ask me to explain India's Indian Rupee, and the answer is dead political will to deregulate laws and export shackles and too an extent sub-standard image in terms of product quality and marketing. I should do justice and give this subject its due space in form of another post.

The problem is that everyone benefits (in the short term) from the fundamental misalignment's in currency markets. Traders like to mock purchasing power parity, but over the long-term, this is what drives exchange rates. Adjusting for taxes, laws, and other peculiarities which distinguish one economy from another, prices in countries at comparable stages of development should converge over the long-term. You can see from The Economist’s Big Mac Index that this is largely the case. As emerging market economies develop, their prices will gradually rise both absolutely (due to inflation) and relatively (when measured against other currencies).

more to continue...

Capitalist and Communist... Thumbs up, Thumbs down

Communism has known to be the direct opposite of the capitalists and the very concept of the ownership of any business in a capitalist economy is irrelevant. In implementation, it creates a controversy and clash of policies and actions. There has been a wave of takeover, some hostile and some amicable, of American companies by Japanese firms in the 1980s. The acquisition of Germany based Mannesmann by Vodafone in 2000 to the recent plethora of increasing private equity and venture capital firms and their acquisitions have often irked the social fabric of national pride and anxiety.

Social and Business Economists have highlighted the concerns which will intensify over the next decade, as BRIC and specifically Chinese state owned firms are on a inorganic activity growth radar. Chinese companies have recorded record numbers in terms of foreign M&As in 2010. They have been bidding for everything ranging from gas (Americas), oil (US) and electricity (Brazil) to cars (Swedish Volvo).

The very idea of communists buying the companies of capitalist is a disparity as far as economic theory of liberism is concerned. This is what has been irking the Repulics and the Democrats alike. Take a 2009 story, where the National Energy Administration (US) agreed to establish a special fund for China's state-owned companies to buy oil and gas firms overseas. The beneficiaries being the Petrochina, Sinopec and CNOOC, which enabled benefit in terms of low interest loans and direct capital injections.

Chinese companies were seen as an example and epitome of state capitalism. Economic
factors like emerging world's non credit culture and the huge reserves of public saving, their resource wealth and the collapse of free market model led to a hailing of state capitalism. The value of the globe’s emerging stock markets have risen fivefold ($80,000 billion from $14,000 billion), taking the emerging market share of global equity markets from 31 % to 55 %.

The so called first world has coped up with countries such as South Korea and Singapore, who have been on an acquiring spree of companies outside their countries. The developed world has the experience of tackling the rise of mercantile economies but China stands apart, it is already the world’s second biggest economy, and in another two decades is rightly poised to overtake America. Chinese firms, till the outbreak of recessionary times, have looked inwards. The rising oil prices and the recessionary pressures on the US have made them potential targets for their vast resources abroad. Nothing could be more apt then the case of Unocal.

China stands fifth in outbound investments globally. Unearthing the pages of history shows that both Britain and America had shares of about 50%, in 1914 and 1967 respectively at their prime of supremacy. The biggest weight on the scales will be the Chinese rate of government investments powered by the per capita savings of the people. These monies today are invested in government bonds and treasuries of the first world counties; tomorrow this will serve a pool which can be used to buy companies and insulate the Chinese people against the first world countries currency devaluations and financial defaults.

Taking a cue from the chapter of globalisation, very similar to the old way of annexation of countries, a company (country) tries to inorganically for primarily three reasons: secure raw materials for future production, acquire better technical knowhow and the most important, to gain access to foreign markets.

In a normal situation, private companies around the atlas, find and allocate their
resources towards the attainment of perfecting its strategy to maximize its customers base.

These are governed by market and economic logic. So far so good, now the idea that an communist government might dominate the realms of global capitalism scenario is
unappealing. The very idea of shift in the control of global resources to an body which would not be market driven but official driven, an establishment principled on politics (principle, if you please) and not profit are the real concerns. Developed countries like Australia and Canada, which were once open for takeovers from the foreign countries, are now escalading the barriers for Chinese, especially in the arena of exhaustible resources.

China has been most active in deal making for the natural resources, yet its way off the needed quantities to control the rigging capacity of the markets for such commodities.

The Americas, Australasia and the Europe should consider subsidized capital of the Chinese. The major focus in these terms should be dealt with strengthening and plugging the loopholes in the competition law rather than trying to stop the investment flow, thus constraining the movement of capital around.

Taking the example of Geely, the new owners of Volvo. It made complete sense for both the parties. Geely had been trying to launch itself into European markets but was losing on the pricing factor and Volvo was in deep crisis since it could not find distribution partners in Asia to sell its cars. Volvo's existence was threatened due to its inability to sell more care in Asia.

CNOOC was one of the greatest finds of Warren Buffet n the last century. Chinese firms are believed to come with a lot of perks such as lower operational costs and access to newer and fresh markets to otherwise flagging companies in the saturated markets. In BRIC, Indian and Brazilian firms have the maximum advantage of being the free and open market policy adopters. But China is catching up fast . . . really really fast.

The battle between a Capitalist Ego and a Communist Strategy...

Communism has known to be the direct opposite of the capitalists and the very concept of communist ownership of a business in a capitalist economy is irrelevant. In reality, it creates a controversy and clash of policies and actions. There has been a wave of takeover, some hostile and some amicable, of American companies by Japanese firms in the 1980s. Since the acquisition of Germany based Mannesmann by Vodafone in 2000 to the recent plethora of increasing private equity and venture capital firms and their acquisitions have often irked the social fabric of national pride and anxiety of superpowers.

Social and Business Economists have highlighted the concerns which will not be easy to slide under the carpet and definitely will intensify over the next decade, as the BRIC countries and specifically Chinese state owned firms keep themselves active on the inorganic activity growth radar. Chinese companies have surpassed record numbers in terms of foreign M&A in 2010. They have been bidding for everything ranging from gas (Americas), oil (US) and electricity (Brazil) to cars (Swedish Volvo).
The very idea of communists buying the companies of capitalist is a disparity as far as economic theory of liberties is concerned. This is what has been irking the Republics and the Democrats alike. Take a 2009 story, where the National Energy Administration (US) agreed to establish a special fund for China's state-owned companies to buy oil and gas firms overseas. The beneficiaries being the Petrochina, Sinopec and CNOOC, which enabled benefit in terms of low interest loans and direct capital injections.

Chinese companies were seen as an example and epitome of state capitalism. Economic factors like emerging world's non credit culture and the huge reserves of public saving, their resource wealth and the collapse of free market model led to a hailing of state capitalism. The value of the globe’s emerging stock markets have risen fivefold ($80,000 billion from $14,000 billion), taking the emerging market share of global equity markets from 31 % to 55 %.

The so called ‘first world ‘has coped up with countries such as South Korea and Singapore, who have been on an acquiring spree of companies outside their countries. The developed world has the experience of tackling the rise of mercantile economies but China stands apart, it is already the world’s second biggest economy, and in another two decades is rightly poised to overtake America. Chinese firms, till the outbreak of recessionary times, have looked inwards. The rising oil prices and the recessionary pressures on the US have made them potential targets for their vast resources abroad. Nothing could be more apt then the case of Unocal.

China stands fifth in outbound investments globally. Unearthing the pages of history shows that both Britain and America had shares of about 50%, in 1914 and 1967 respectively at their prime of supremacy. The biggest weight on the scales will be the Chinese rate of government investments powered by the per capita savings of the people. These monies today are invested in government bonds and treasuries of the first world counties; tomorrow this will serve a pool which can be used to buy companies and insulate the Chinese people against the first world countries currency devaluations and financial defaults.

Taking a cue from the chapter of globalization, very similar to the old way of annexation of countries, a company (country) tries to inorganically for primarily three reasons: secure raw materials for future production, acquire better technical know how and the most important, to gain access to foreign markets.
In a normal situation, private companies around the atlas, find and allocate their resources towards the attainment of perfecting its strategy to maximize its customer’s base. These are governed by market and economic logic. So far so good, now the idea that a communist government might dominate the realms of global capitalism scenario is unappealing. The very idea of shift in the control of global resources to a body which would not be market driven but official driven, an establishment principled on politics (principle, if you please) and not profit are the real concerns. Developed countries like Australia and Canada, which were once open for takeovers from the foreign countries, are now escalating the barriers for Chinese, especially in the arena of exhaustible resources like oil and gas.

China has been most active in deal making for the natural resources, yet its way off the needed quantities to control the rigging capacity of the markets for such commodities. The Americas, Australasia and the Europe should consider subsidized capital of the Chinese. The major focus in these terms should be dealt with strengthening and plugging the loopholes in the competition law rather than trying to stop the investment flow, thus constraining the movement of capital around.
Taking the example of Geely, the new owners of Volvo. It made complete mutual sense for both the parties. Geely had been trying to launch itself into European markets but was losing on the pricing factor and Volvo was in deep crisis since it could not find distribution partners in Asia to sell its cars. Volvo's existence was threatened due to its inability to sell more care in Asia.

The Chinese firm, CNOOC was one of the greatest finds of Warren Buffet n the last century. Chinese firms are believed to come with a lot of perks such as lower operational costs and access to newer and fresh markets to otherwise flagging companies in the saturated markets. In BRIC, Indian and Brazilian firms have the maximum advantage of being the free and open market policy adopters. But China is catching up fast . . . really really fast.