From 1985 Plaza Accord to 2017 'Trump Tower Accord'?

♠ Posted by Emmanuel in , at 11/30/2016 05:29:00 PM
Like Macaulay Culkin, foreign exchange markets circa 2017 may need some direction from Trump.
Too strong a US dollar is not usually good for the rest of the world economy, but that's what we have at the moment with widespread expectations that the United States will hike interest rates faster with a "President Trump." As growth is expected to ramp up through pump priming, the dollar has strengthened accordingly. A casualty since the November 8 election result has been emerging markets--currencies, bonds, stocks...you name it. Not only do they have to deal with an increasingly more attractive US market, but there's also Trump's threat of protectionist measures against developing countries. It has not been a pretty picture in the emerging markets.

However, neither the incoming US leadership nor the developing countries currently being roiled by the strong dollar may necessarily be pleased by this state of affairs. US exports would become less competitive abroad with a strong currency. Meanwhile, the likes of China, Mexico and so on would become easier target for unfairly "manipulating" their exchange rates from the perspective of a President Trump when, in reality, it is the rampaging dollar that is more behind the current moves.

What to do? In 1985, the United States famously gathered economic bigwigs of other major American trade partners at the famous Plaza Hotel in New York to agree to coordinated interventions leading to a weaker US dollar and stronger yen, deutsche marks, francs, etc. Between then and now, Donald Trump briefly owned the Plaza--hence his cameo appearance giving directions to Macaulay Culkin in Home Alone 2: Lost in New York set in--where else--the New York Plaza.

Trump may no longer own the Plaza, but the idea of gathering foreign economic leaders to weaken the dollar once more makes sense according to Hongkongers Andrew Sheng and Xiao Geng:
The strengthening dollar and weakening yuan are shaping up as powerful crosscurrents for global growth. Their divergence could amplify tensions between the U.S. and China over a persistent trade deficit that President-elect Donald Trump has promised to shrink through tariffs and by labeling China a currency manipulator, risking a trade war between the world’s biggest economies. It’s a scenario both sides are keen to avoid.

China doesn’t want excessive yuan weakness because it would prompt companies and savers to shift money out of the country at a destabilizing pace. America doesn’t want unbridled dollar strength that would hurt exporters. While the problem could self correct if the greenback loses steam, there are also worries that it won’t.
How about the Trump Tower Accord--especially to help Asia avoid another regional financial dislocation. The US getting its external deficit under control would also be a plus:
One solution could be a "Trump Tower Accord" modeled on the 1985 Plaza Accord named after the New York hotel where it was signed. Like that pact, a new agreement would seek to put a lid on the dollar’s gains...

"A Trump Tower Accord is needed to bring some coordination into the international financial system to avoid the unnecessary negative shocks and uncertainty of uncoordinated policies," Xiao said in emailed remarks...

The risks are especially acute in Asia, home to the world’s fastest-growing economies. A weakening yuan -- it fell to an eight-year low versus the dollar last week -- will pressure regional currencies just as the Fed gears up to lift interest rates for only the second time in a decade. That combination will strain government’s international reserves and pressure companies who borrowed dollar denominated debt. 
Because such a move could worsen the trade deficit, and work against the President-elect’s stated intention to keep American jobs from migrating overseas, “it is hard to rule out” currency intervention as something a Trump treasury department might find politically expedient, Faust said.
As pointed out by the authors, the US dollar was already overvalued by 10-20% at midyear. What more now as the currency has only gained steam since then? Sometimes, the market may need a nudge to set itself right on occasion. That moment is probably now.
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Life at Samsung's Vietnam Factory After Galaxy Note 7

♠ Posted by Emmanuel in , at 11/23/2016 06:00:00 PM
No thanks to Galaxy Note 7, it won't be a very merry Christmas in these parts.
The recall of Samsung's Galaxy Note 7 worldwide for its battery catching fire has damaged any number of things including Samsung's sales and profits, Samsung's reputation (though some would say less than you think) and...Samsung's hiring of local workers at its Vietnam assembly plant[s]. Nearly a third of Samsung's assembly operations are now being handled in the lower-cost Southeast Asian destination. Obviously, hopes were high that business would pick up at year end when retail demand is highest for the Christmas season.

However, what we instead have is whiplash from the Galaxy Note 7 being discontinued due to safety concerns. Anecdotes about slowing activity are emerging from areas surrounding Samsung's factory town:
"The factory used to be so busy toward the end of the year, and the workers wouldn't come out until night," Nguyen Van Loi says as evening falls and employees shuffle out. He has been selling fruit here for six years, but his sales this month are down 30% from October.

Just over a month has passed since Samsung halted production of the Galaxy Note 7 after a number of phones' batteries caught fire. Some workers at the Bac Ninh plant, which employs some 110,000 people, have been told to stay home. Others have seen their pay fall by half owing to a loss of overtime. "My pay has gone down by 40-50%," says Nguyen Thi Kieu Anh, a 19-year-old assembly line worker. She and other workers say they have been going home three hours earlier, at 5 p.m., since production of the Note 7 ended in mid-October. 
Worse may be in store:
While the factory appears to have been spared layoffs so far, those consigned to waiting at home have had their pay reduced by 70%, employees say. New hiring to ready for the typical year-end rush also appears to have been halted. Nguyen Van Chien, who runs a nearby boarding house, said he now has 30 roomers compared with 50 last year. With his income down by a third, he is finding it hard to make ends meet, he said.
It's going to be a lonely Christmas near Vietnam's manufacturing operations. For what it's worth, though, less than a tenth of its population is Christian, so Samsung's ill-timed lump of coal may matter less.
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Korea, Japan Try to Save Their Shipping Industries

♠ Posted by Emmanuel in at 11/21/2016 04:53:00 PM
It's better to merge than to fade away: the tale of global shipping.
It is no big secret that the global shipping industry is currently encountering difficult conditions. The bankruptcy of Korean shipping giant Hanjin points out how overcapacity--too many ships have been built in expectation of rising shipping demand worldwide in recent years that didn't materialize--has dented the fortunes of this industry. Supply exceeds demand, and correcting the oversupply has not been a pleasant process for those involved. Given its crucial place in ensuring that goods manufactured in East Asia get to consumer markets elsewhere, however, the likes of Korea and Japan cannot simply let market forces play out and quite possibly result in the further diminution of their shipping capabilities.

First up is Korea, where a bankruptcy court has approved of a mid-sized carrier picking up the remaining assets of Hanjin. Especially attractive was the idea that they would lay off fewer workers:
Shipping operator Korea Line Corp. won a contest for some assets of bankrupt Hanjin Shipping Co., whose collapse in late August stranded billions of dollars in cargo at sea, disrupting supply chains world-wide. In a surprise decision, a Seoul court on Monday awarded Korea Line, a midsize bulk-shipping operator, the first right to purchase the assets of Hanjin’s Asia-U.S. route, as well as its stake in a California terminal.

A judge at the Seoul Central District Court, which is handling Hanjin’s insolvency proceedings, said it chose Korea Line over Hyundai Merchant Marine Co., which had been expected to win. Hyundai Merchant was backed by senior government officials and its main creditors, which said they would promote the company as the country’s largest oceangoing carrier.

“Korea Line proposed better terms, including higher prices,” the judge said. “It also offered to take over more Hanjin employees.”
Fears of another Hanjin are also playing out in Japan in the form of consolidation among the largest shipping lines. Instead of competing with each other for business tooth and nail and denting profit margins in the process, this merger is intended to decrease intra-national competition to the benefit of the wider Japan, Inc:
Decades of fierce rivalry between the three main Japanese ocean carriers ended with the agreement to merge their container operations that will propel the new entity into the league of the mega-lines.

In its analysis of the Japanese merger of “K” Line, MOL, and NYK Line, Alphaliner said the “J-3” will become the world’s sixth-largest container line, with the top seven lines controlling around 65 percent of the global liner capacity by 2018. The top seven are expected to widen the gap even further with the rest of the market in the coming years.

The merged pan-Japanese carrier will operate a combined fleet of some 1.37 million twenty-foot-equivalent units with a global market share of about 6.6 percent, based on Alphaliner’s assessment of the capacity operated by the three carriers as at October 31. Their joint orderbook totals 358,000 TEUs.
It will be interesting to see how shipping lines will be impacted by non-passage of the TPP enlargement and China's promotion of the rival RCEP. I'll be posting more about that shortly...
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Economic Folly: Thai Rice Subsidies Never Die

♠ Posted by Emmanuel in , at 11/19/2016 05:13:00 PM
The importance of rice production to the Thai economy cannot be overstated. In the past, I have discussed [1, 2] the current ruling junta's efforts to punish the overthrown Yingluck Shinawatra for her abuses in overpaying for rice to buy the favor of those in rural communities. Appallingly, however, the same junta is now planning to implement another rice subsidy program. This while it is busy pursuing the prosecution of Yingluck Sinawatra.

The junta's calculations are aimed at regime survival. With rice prices at multi-year lows and the recent death of longtime figurehead King Bhumipol, it needs to prop up its domestic popularity lest it be forced out of power:
Just weeks after Thailand’s military government imposed an unprecedented $1 billion fine against an ousted prime minister for her handling of an ill-fated rice subsidy program that racked up huge losses, the junta did something else extraordinary: It announced a major assistance plan of its own. The $1.5 billion effort, which helps struggling rice farmers in part by guaranteeing prices well above market rates, is ironic given its similarities to the larger subsidy program for which the junta has castigated ex-premier Yingluck Shinawatra.

But the current government may have had little choice but to act. Global prices for the grain have plummeted to their lowest in nearly a decade, severely weakening an industry crucial to Thailand’s economic well-being. Some analysts say the about-face is also intended to stave off potential unrest during the sensitive, year-long mourning period following the death last month of King Bhumibol Adulyadej, and to win over some of the politically powerful farmers who make up 40 percent of the population. The rice-growing north is a traditional stronghold of Yingluck and her allies.

The junta has begun to realize “they simply cannot ignore the plight of the farmers anymore, especially (if) they wish to be in power for the long term,” said Puangthong R. Pawakapan, an associate professor at Bangkok’s Chulalongkorn University.
That said, the junta's program is said to be less costly and therefore more economically viable:
The junta’s plan is similar to Yingluck’s in that it is offering artificially high prices for rice, dispersing large sums to farmers and encouraging them to keep the grain off market in hopes of stimulating prices. But Jitti Mongkolnchaiarunya, dean of Thammasat University’s School of Development Studies, said the latest plan is less risky because its scope is smaller, its price ceilings lower, and rice farmers — not the government — will be responsible for storage.
What can I say? It's a tragicomedy that never seems to end.
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Will Apple Supplier Foxconn Make iPhones Stateside?

♠ Posted by Emmanuel in at 11/18/2016 11:56:00 AM
If Apple supplier Foxconn starts assembling iPhones Stateside, Tim Cook may not need to visit China anymore.
Despite the US stock markets rising since the election of Donald Trump due to expectations that he will inject massive amounts of stimulus into the economy, a notable laggard has been Apple. Like other technology companies with supply chains that are extensive in Asia, Trump's protectionist rhetoric has been of concern to investors. That is, will punitive tariffs be applied to practically all the things Apple sells since most of it is made in the Far East? (Is that now the Fear East?)

The Nikkei Asian Review has an interesting new article suggesting that Foxconn--the largest Apple supplier based in Taiwan and with many facilities in mainland China--is considering setting up Stateside. (Yes, this is the Foxconn of the now-infamous worker dormitory suicides.) The purpose, evidently, would be to get around the criticism that Apple has been "sending jobs" abroad:
iPhones might one day soon carry "Made in America" labels. Key Apple assembler Hon Hai Precision Industry, also known as Foxconn Technology Group, has been studying the possibility of moving iPhone production to the U.S., sources told the Nikkei Asian Review. "Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the U.S.," a source said.

"Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns." Foxconn, based in the gritty, industrial Tucheng district in suburban Taipei, and its smaller Taiwanese rival churn out more than 200 million iPhones annually from their massive Chinese campuses.
So it's mainly Apple that is prodding its Taiwanese suppliers instead of them thinking about relocating Stateside. As you'd expect, their concerns mostly deal with increased costs of manufacturing in the US:
Another source said that while Foxconn had been working on the request from Apple Inc., its biggest customer that accounts for more than 50% of its sales, Chairman Terry Gou had been less enthusiastic due to an inevitable rise in production costs.

"Making iPhones in the U.S. means the cost will more than double," the source said. The person added that one view among the Apple supply chain in Taiwan is that U.S. President-elect Donald Trump may push the Cupertino, California-based tech titan to make a certain number of iPhone components at home.
The thing about making iPhones in the States is that they were never made there to begin with, so there's no possible historical counterexample to cite. Moreover, Trump's idea is probably not to compel foreign companies make iPhone parts in the US, but rather American firms. Still, it does show how concerned Apple is about the political entanglements that it may get into with an incoming Trump presidency given his protectionist campaign rhetoric. Although campaign rhetoric may not accurately reflect actual policy, it always helps to be prepared. 
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Trump Makes America #1 Environmental Rogue Regime Again

♠ Posted by Emmanuel in , at 11/13/2016 05:32:00 PM
Welcome to the coalface, circa 2016 in TrumpWorld.
As a lover of conspiracy theories, Donald Trump famously said that climate change is a hoax perpetuated by the Chinese (nevermind that they're now the world's largest carbon emitters, but hey, what's logic gotta do with it?) What are the consequences of this belief? Initially, Trump may withdraw the United States' participation in the Paris Agreement. Oddly enough, the Chinese--once the most obstructive of countries on dealing with the issue--are now cautioning Trump on junking the agreement at the ongoing UNFCCC Conference of the Parties in Morocco:
In a sign of how far the world has shifted in recognising the need to tackle global warming, Beijing — once seen as an obstructive force in UN climate talks — is now leading the push for progress by responding to fears that Mr Trump would pull the US out of the landmark accord.

“It is global society’s will that all want to co-operate to combat climate change,” a senior Beijing negotiator said in Marrakesh on Friday, at the first round of UN talks since the Paris deal was sealed last December. The Chinese negotiators added that “any movement by the new US government” would not affect their transition towards becoming a greener economy.
At stake is a lot of funding for developing countries to deal with the problem. Namely, the Green Climate Fund (GCF) meant to provide $100 billion from developed to developing countries to deal with it:
Without extra money, they say they won't be able to do so much. Trump, who has called man-made climate change a hoax, wants to cancel the Paris Agreement and halt any U.S. taxpayer funds for U.N. global warming programs.

If he follows through, that will threaten a collective pledge by rich nations in Paris to raise climate finance from both public and private sources from a combined $100 billion a year promised for 2020.
Since Trump's win, nations from China to Saudi Arabia have reaffirmed their support for the Paris Agreement's goal of eliminating net greenhouse gas emissions sometime from 2050 to 2100.
But there is widespread unease about finance at the Nov. 7-18 talks on climate change among almost 200 nations being held in Marrakesh, Morocco.
It is arguably that the rest of the world has so little say in US elections when what happens there has such major consequences for everyone else--including the fate of the planet. It's back to the situation while Bush Jr. was in office: America is likely to become the world's worst environmental rogue regime again.
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To *Really* Escape Trump, Yanks Should Move to Bhutan

♠ Posted by Emmanuel in at 11/11/2016 11:01:00 AM
Americans fleeing TrumpLand are well-advised to consider splendidly isolated and beautiful Bhutan (pop. ~760k).
While the election of Donald Trump as US president was as shocking to me as it was to the rest of the world, something else struck me as equally baffling: Americans unhappy about this turn of events--his opponent won more votes overall, remember--began crashing websites for immigration to Canada and New Zealand. I presume that they were looking for Anglophone nations to move to with generally liberal social orientations. However, consider that these countries are part of the "Five Eyes" intelligence consortium, so you'd hardly be getting away from this particular security grouping. Moreover, Canada and New Zealand have deep economic ties as well with the United States. For instance, over 60% of Canada's imports and exports involve its neighbor the United States.

So, what happens in the US does have a significant bearing on the likes of Canada and New Zealand given their significant security, economic, and political ties. No, if you really want to get away from Trump's United States and all that it stands for, I would suggest moving to countries with the following characteristics:
  • negligible diplomatic ties with the United States;
  • negligible economic ties with the United States; and
  • progressive social policies
Actually, the United States has trade with almost every nation on earth, save perhaps North Korea. Its diplomatic representation is also pretty much universal. I also have difficulties finding countries with progressive social policies fairly isolated from the United States--not repressive regimes the US likes applying sanctions to. So it took me a long time to look around before [ahem] settling on...Bhutan. Its virtues in line with the criteria mentioned above are substantial:

[1] Diplomatic relations - There is no US embassy in Bhutan. Instead, the nearest consular outpost of the Yanks is in New Delhi, India. How isolated is Bhutan? When Secretary of State John Kerry met its prime minister in 2015--the first time a top US diplomat has ever met a Bhutanese leader--the meeting did not even happen in Bhutan itself but rather in Ahmadabad, India.

[2] Economic relations - Bhutan, according to UNCTAD statistics, is home to zero American foreign direct investment. Nada, zip, zilch. So, you won't see McDonalds every other street corner on the high street (which is an alien concept to begin with). Meanwhile, bilateral trade is next to nothing--something like $6 million a year.

[3] Progressive social policies - This is where Bhutan should score big points with the Bernie Sanders set. Instead of using using GDP as its measure of progress, the Bhutanese have famously made Gross National Happiness their yardstick:
Perhaps inspired by age-old wisdom in the ancient Kingdom of Bhutan, the fourth King concluded that GDP was neither an equitable nor a meaningful measurement for human happiness, nor should it be the primary focus for governance; and thus the philosophy of Gross National Happiness: GNH is born.

Since that time this pioneering vision of GNH has guided Bhutan’s development and policy formation. Unique among the community of nations, it is a balanced ‘middle path’ in which equitable socio-economic development is integrated with environmental conservation, cultural promotion and good governance.
So our American friends--and a whole lot of other progressive, US-skeptical readers besides--are probably thinking: "I'm sold! Where do I sign up?" But alas, there is a catch: Naturalization is fairly restrictive--especially for those born before 1985:
BY NATURALIZATION: Bhutanese citizenship may be acquired upon fulfillment of the conditions listed below and upon obtaining permission of government: Naturalized before June 10, 1985: Person had reached age 21, had resided in country for at least 10 years, owned agricultural land, and had the petition for naturalization accepted by government authority.

Naturalized after June 10, 1985: Person is 21 years old, has resided in country for 15 years if one or more parents is a citizen, (20 years for child of non-citizen), and knows the language and customs.
Given the restrictiveness of Bhutan, the best most can aspire to is "visitor" status. But hey, if the whole idea is not really to avoid the US forever but to camp out somewhere until Trump's term in office ends (or he is removed from office), then what are you waiting for?
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Beautician 1, Brexit 0: EU's Turn to Stop It

♠ Posted by Emmanuel in , at 11/03/2016 03:45:00 PM
The pound flies after the court decision was released requiring parliamentary approval of Brexit.
A few months ago I featured a story on the legal challenge mounted by British hairdresser Deir Dos Santos concerning the need for UK parliamentary approval to commence on the process of exiting the European Union. In EU jargon, this is known as the Article 50 process. Today, the ruling was issued in favor of Deir Dos Santos and against Prime Minister Theresa May who intended to serve Article 50 to the EU by March of 2017.

My belief is that this is not a mere "technicality" on the road to Brexit. Instead, requiring parliamentary approval--if upheld since HM government intends to appeal--changes the picture entirely. Prior to this turn of events, the British pound was driven to multiyear lows by the fear of a "hard Brexit"--the UK leaving the EU without having agreed to market access agreements. Recall that UK parliamentarians were largely against Brexit (480 stay against 150 leave). So, while the ruling Conservatives and their Labour counterparts give lip service that they will honor the result of the referendum (and the "people's will" by extension), the actual implication is that anything remotely resembling a hard Brexit will likely be turned down by parliament. What politician would like to be on record for having royally screwed the British economy by isolating it economically from its most important trade partners? 

So, the job for the EU assuming they want to keep Britain in their fold is now much simpler. Knowing that parliamentarians--a generally more educated bunch than the mob of the electorate--will scotch a highly unfavorable deal, the EU simply needs to keep making grossly unfair offers to the UK over and over. Since parliament is now required to consider the offer tabled by the EU prior to the UK triggering Article 50, the EU should adopt an absolutely hardline position to negotiations that no sane British politician would agree to. That is, next to no trade concessions whatsoever. Parliamentarians were already disinclined to Brexit to begin with, so now they have a simple excuse to keep rejecting it: "the EU keeps making a bad offer."

Not only does this keep the demonstration effect of how awful life could be outside the EU to deter others from leaving, but it also keeps the UK inside it indefinitely if Eurocrats play their cards right.

The EU always intended to offer the UK a raw deal. The difference now is that relatively sane people (UK parliamentarians) need to agree to this raw deal. The EU should make the terms so ludicrously bad that no quorum will be arrived at to trigger Article 50. After a few years, this stuff will have died down as folks get tired of this entire nonsense. Everyone can be happy save for the delusional Brexiteers. 
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