Raw materials, Exchange rates, food prices.
Let’s start out with pointing out, that something happened last summer. I’m not exactly sure what, and suggestions are welcome – however ill founded and speculative, your guess is for the time being as good as mine. We’ll try and find reasons as distinct from triggers.
Corn and copper dropped in price – a drop only partially recovered, though of late a new drop seems likely. Seems? The reservation is partly due to the fact that figures have a tendency to be revised backwards, partly because it is early days.
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What should be noted is that corn prices (proxy for food) have doubled in less than two years, cobber (proxy for industrial raw materials) up 1/4 in the same time and oil (energy) about 1/3. Try and ignore minor spikes and troughs as raw materials are speculative and nervous.
The grain price index reveals a bit more: Clearly corn is the leader, which points towards the USA (means everything on corn as opposed to other grains where the US might be important, but not necessarily decisive).
The currency fluctuations point to a steady revaluation of the RMB relative to USD about 5-6% over the last couple of years, so it is nothing spectacular – indeed almost cosmetic. But against the EUR the rise is about 25% – which correcting for time period etc. is about the double. There is nothing strange in that as China is shifting from being an export driven economy to an import ditto.
China tries to keep her currency undervalued in relation to the USD to save the crumps of the export and overvalued with respect to the EUR. How are they succeeding? Poorly.
a) Exports to the US is not going to pick up any time soon, so even the modest revaluation – though in no way helpful – doesn’t really matter. Imports are not really helped by the pathetic revaluation.
b) With respect to the EUR the revaluation really hurts exports to an increasingly job and cost conscious continent. On the other hand it stimulates European exports.
There is clear evidence of this in the Q1 2012 reports from Germany (where do you think that heavy construction equipment is made – and the machines that build the Chinese machines?) are favourable. It is German growth alone that keeps Europe out of a recession – exports out of the Euro-zone are the secret behind that. The Mediterranean mess of PIGS (known vernacularly as the Garlic Stinkers – German humour isn’t sophisticated) is not that unwelcome to the Germans, as it debases their export currency relative to what it would have been otherwise.
The meeting between Merkel and the newly elected Hollande (known popularly as Merde which roughly translates to “Oh shit!” – French humour isn’t much better) was a bit awkward as Hollande was trying to persuade Merkel for a stimulus packet. The reply to that request was somewhat along the lines: “Crisis? What crisis? We are raising wages and hiring! If you produce preiswert (literarily = worth the price), we will meet you with open wallets!”
On that background it is understandable that Röttgen that has just lost the regional election in Nordrhein-Westphalen (the iron heart of Germany) was promptly fired. If you can’t win with that kind of backing …
With respect to China’s attempt to have one export currency and one import currency all in one: We see the result in the prices on raw materials: They adjust to the confusion and they go up until the result is the worst possible for China.
Exports are stopped because prices aren’t competitive anymore and imports will have to be paid in real money – and lots of it.
The rest of the world is rather pleased with the Chinese ineptitude. This is another reason for caution in the projections – we don’t know for how long the Chinese economy can linger on: The Piggy Bank is vast.
Jacob Wolinsky asked me: “Why is economic stimulus OK in the USA and not in Europe?”
Put simply: The economically healthy parts of Europe is doing fine, but are dragged down by “nose picking” employment.