I Think, Therefore It Exists
By John R. Taylor, Jr.
My apologies to Rene Descartes for this perversion of his famous proof, “I think, therefore I am,” but in modern media- and spin-dominated times it seems to me that the current European leadership believe – and are aggressively applying – my new reformulation of this phrase. The concept of projecting one’s internally-generated thought processes and formulations to others through the impressive powers of modern media extends throughout the developed world. Just this week, Elon Musk created a global sensation as he revealed his thoughts about the “hyperloop,” a tube that would allow people to travel from Los Angeles to San Francisco in 30 minutes. Today, thoughts and dreams are as good as reality – YouTube and the internet assure it! For those who are not American, it might be hard to believe but there is a family, the Kardashians, who have no talent, have done nothing but be outrageous, yet they are omnipresent in the popular media. They are a highly successful mirage. For those of us who analyze reality, media events like the hyperloop and the Kardashians might be fun, but treating actual events like they are a media creation that can be spun for the right impact is a terrible trend. The actual unemployment and economic pain occurring in Europe is a reality that cannot changed into something else by clever speeches and public relations. It is not honest to argue that the euro is actually a political construction and that economics are secondary.
Ever since the inception of the euro, those countries within the Eurozone have dramatically underperformed as a group, so much so that Japan's performance during its "lost" decade is far better on almost every dimension. Eurozone GDP grew more slowly, productivity growth was about a third of Japan’s, and labor cost increases were much lower. Looking at the last decade’s performance country by country, only a few of them are performing as well as the "non-euro" Europeans or as well as they did in the 1990’s. The Eurozone countries are not converging as Europeans had promised they would, but in fact are diverging in a rather startling manner. The European story does not match the reality. Policymakers never seem to debate the facts and criticism is ruled out. The goal is almost certainly saving the euro, but the other parts of reality are airbrushed out. The fact that a whole generation of southern European youth will struggle to find any real job and so fail to start a family can only lead to despair and political extremism. Reading Secular Cycles by Peter Turchin and Sergey Nefedov, I found an interesting discussion of Malthusian, Marxian, and statist interpretations of agrarian cycles, only to realize that this euro episode would fit right in. State domination of the economy and the personal livelihood of modern Europeans means that the political elite can have its way for many years, following its own plan while the economic and social situation can be ignored. Emigration and the drop in the birth rate are signs that the economy and society are in trouble, just like they were centuries ago. As the authors point out “the late stagflation phase… is typically characterized by the harsh oppression of the productive segments of society [workers] and extreme social inequality.” The next stage is further slowdown and economic decline, and eventually the political agreement will break down.
Mexico Diverging from Other Commodity Currencies
By Jonathan Clark
The correlation among currencies has broken down this year. Instead of the herding around the USD that has characterized trading in recent years (when currencies tended to simultaneously appreciate or depreciate versus the USD), they now tend to trade by region or category. The peak for most commodity currencies was on April 11 of this year and, since that time, the weakest have been BRL, AUD, ZAR and CLP. Somewhat surprisingly, the S&P GSCI Commodity Index (which is an appropriate yardstick for an oil exporting country like Mexico) made its high for the year in february and a low around the middle of April. Although this seems counterintuitive, as commodity prices can generally be expected to influence export earnings and, by extension, commodity currencies, we are forced to argue that it isn’t commodity prices that are currently the main driver of currencies but something else. Capital inflows into the commodity-producing countries are drying up and this is undermining the currencies. Mexico is different. The Mexican peso is the only one of the commodity currencies to strengthen versus the US dollar this year. President Enrique Peña Nieto is proposing reforms that would open up the oil and natural gas industry to foreign investors to reverse falling production and declining reserves, ending a monopoly by the state-owned Petróleos Mexicanos (PEMEX) that has held since 1938. Even this new law will not allow foreign companies to own the resources outright as they can in the US, but rather must sell production to the government.Nevertheless, there are tremendous investment opportunities – especially for deepwater drilling in the Gulf of Mexico. Although capital is shunning mining, it is likely to be attracted to Mexico and this should support the peso over a longer-term timeframe.
Although the longer-term outlook for USD/MXN is negative, we doubt it will see much weakness for the next month or so. The emerging currencies are likely to struggle into the start of Federal Reserve tapering of asset purchases, expected in September. After the shock wears off, these markets should start to improve. The medium-term cycles call for dollar/Mexico to trade at least weakly higher into late September or October. Our target for this upmove is the 13.0500 area and, if seen, this should be a good place to begin selling dollars. Following this expected peak, uSD/MXN should turn lower and decline into Q1 of 2014. Our initial target for this downmove is the 12.1500 area. Only a close above 13.0500 means that it could rally to the 13.4000 area before peaking in October, but we consider this more positive dollar outlook unlikely
By John R. Taylor, Jr.
My apologies to Rene Descartes for this perversion of his famous proof, “I think, therefore I am,” but in modern media- and spin-dominated times it seems to me that the current European leadership believe – and are aggressively applying – my new reformulation of this phrase. The concept of projecting one’s internally-generated thought processes and formulations to others through the impressive powers of modern media extends throughout the developed world. Just this week, Elon Musk created a global sensation as he revealed his thoughts about the “hyperloop,” a tube that would allow people to travel from Los Angeles to San Francisco in 30 minutes. Today, thoughts and dreams are as good as reality – YouTube and the internet assure it! For those who are not American, it might be hard to believe but there is a family, the Kardashians, who have no talent, have done nothing but be outrageous, yet they are omnipresent in the popular media. They are a highly successful mirage. For those of us who analyze reality, media events like the hyperloop and the Kardashians might be fun, but treating actual events like they are a media creation that can be spun for the right impact is a terrible trend. The actual unemployment and economic pain occurring in Europe is a reality that cannot changed into something else by clever speeches and public relations. It is not honest to argue that the euro is actually a political construction and that economics are secondary.
Ever since the inception of the euro, those countries within the Eurozone have dramatically underperformed as a group, so much so that Japan's performance during its "lost" decade is far better on almost every dimension. Eurozone GDP grew more slowly, productivity growth was about a third of Japan’s, and labor cost increases were much lower. Looking at the last decade’s performance country by country, only a few of them are performing as well as the "non-euro" Europeans or as well as they did in the 1990’s. The Eurozone countries are not converging as Europeans had promised they would, but in fact are diverging in a rather startling manner. The European story does not match the reality. Policymakers never seem to debate the facts and criticism is ruled out. The goal is almost certainly saving the euro, but the other parts of reality are airbrushed out. The fact that a whole generation of southern European youth will struggle to find any real job and so fail to start a family can only lead to despair and political extremism. Reading Secular Cycles by Peter Turchin and Sergey Nefedov, I found an interesting discussion of Malthusian, Marxian, and statist interpretations of agrarian cycles, only to realize that this euro episode would fit right in. State domination of the economy and the personal livelihood of modern Europeans means that the political elite can have its way for many years, following its own plan while the economic and social situation can be ignored. Emigration and the drop in the birth rate are signs that the economy and society are in trouble, just like they were centuries ago. As the authors point out “the late stagflation phase… is typically characterized by the harsh oppression of the productive segments of society [workers] and extreme social inequality.” The next stage is further slowdown and economic decline, and eventually the political agreement will break down.
Mexico Diverging from Other Commodity Currencies
By Jonathan Clark
The correlation among currencies has broken down this year. Instead of the herding around the USD that has characterized trading in recent years (when currencies tended to simultaneously appreciate or depreciate versus the USD), they now tend to trade by region or category. The peak for most commodity currencies was on April 11 of this year and, since that time, the weakest have been BRL, AUD, ZAR and CLP. Somewhat surprisingly, the S&P GSCI Commodity Index (which is an appropriate yardstick for an oil exporting country like Mexico) made its high for the year in february and a low around the middle of April. Although this seems counterintuitive, as commodity prices can generally be expected to influence export earnings and, by extension, commodity currencies, we are forced to argue that it isn’t commodity prices that are currently the main driver of currencies but something else. Capital inflows into the commodity-producing countries are drying up and this is undermining the currencies. Mexico is different. The Mexican peso is the only one of the commodity currencies to strengthen versus the US dollar this year. President Enrique Peña Nieto is proposing reforms that would open up the oil and natural gas industry to foreign investors to reverse falling production and declining reserves, ending a monopoly by the state-owned Petróleos Mexicanos (PEMEX) that has held since 1938. Even this new law will not allow foreign companies to own the resources outright as they can in the US, but rather must sell production to the government.Nevertheless, there are tremendous investment opportunities – especially for deepwater drilling in the Gulf of Mexico. Although capital is shunning mining, it is likely to be attracted to Mexico and this should support the peso over a longer-term timeframe.
Although the longer-term outlook for USD/MXN is negative, we doubt it will see much weakness for the next month or so. The emerging currencies are likely to struggle into the start of Federal Reserve tapering of asset purchases, expected in September. After the shock wears off, these markets should start to improve. The medium-term cycles call for dollar/Mexico to trade at least weakly higher into late September or October. Our target for this upmove is the 13.0500 area and, if seen, this should be a good place to begin selling dollars. Following this expected peak, uSD/MXN should turn lower and decline into Q1 of 2014. Our initial target for this downmove is the 12.1500 area. Only a close above 13.0500 means that it could rally to the 13.4000 area before peaking in October, but we consider this more positive dollar outlook unlikely
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