You know you live in a strange time when a shrinking economy and a weaker currency causes a 7% surge in a stock market. But this is Japan we’re talking about. It’s where an ancient Eastern culture meets cutting edge Western technology and the result is profound weirdness. Only in Japan can victory be achieved through defeat.
Japan’s economy shrank by 1.4% in 2015, according to GDP figures released yesterday. It’s the incredible shrinking country. Some of this is surely demographic. And a lot of it is the resounding failure of Keynesianism to create wealth. More government spending, greater stimulus, more arrows to Abenomics…none of it has worked to revive the animal spirts of the Japanese.
But it does mean a weaker yen! And that seemed to be good news for equity prices everywhere. The yen was down versus the US dollar overnight. Gold and oil fell too. For a day, for a session, the world made sense again to traders. Breathe.
Don’t forget to think, though. Who creates wealth in the world? Is it governments? Is it the right public policy? Or is it people and the division of labour and enterprise and free trade?
China’s devaluation in historical context
The market already knows what China’s central planners don’t. The market already knows what the yuan is worth. And it’s pricing global growth and stocks accordingly, taking into account what China may accomplish with a further devaluation.
Not that China will admit that it wants or is pursuing a weaker currency. Just the opposite in fact. Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), blamed ‘speculative forces’ for yuan volatility. He told reports there was no basis to expect further devaluation. And he said not to worry about the level of foreign exchange reserves, which have declined by almost $1 trillion as the PBOC supports the yuan in a trading range against its US dollar peg.
British banks divided on EU membership
European banks would be heaving a big sigh of relief on the Japan stimulus and China news. The banks found themselves in the cross hairs last week. It’s been a long time since investors got as panicky about bank shares as they did last week. It may not be long before it happens again.
Here in Britain the banks are beginning to take sides on the Brexit debate. HSBC said it would keep its headquarters in London. But it said it could shift up to 1,000 jobs from London to Paris if Briton’s vote is to leave the European Union.
Meanwhile, the Royal Bank of Scotland’s Ross McEwan said that Brexit uncertainty could ‘slow down’ the British banking sector. Barclay’s John McFarlane went further and said that most members of the lobbying group he represents, ‘feel that staying in a reformed Europe is the right choice.’
For whom? For the British people? Or for the banks? Or are the interests of both groups one and the same? Hmmm. What do you think?
In the meantime, Lord Blackwell from Lloyds has said that without ‘significant change’ Britain’s EU membership can’t last. That sounds about right. But here’s a question: how does Britain go about ‘reforming the EU from within?’ Has the prime minister asked for any ‘significant changes’ to the EU project that make staying in it the best course for the future?
So far, the main argument from the ‘stay’ campaign is that because we can’t know what will happen if we leave, it’s risky to leave. The same could be said for going out your door every day. But you get on with it don’t you?
There was life before the EU. There will be life after. Changes force adaptation. We know what we’re getting now. Why not try for something better?
Ed Note: This article first appeared in Capital and Conflict.
From the Archives…
By Vern Gowdie | Feb 10, 2016