Saturday, September 12, 2009

On Treasury Bonds and Trade Wars IV


We have been on a bit of a hiatus here but that does not mean there have been a lack of interesting developments in the world of economics, finance and geopolitics. Our first order of business is an update to our semi regular series On Treasury Bonds and Trade Wars (view parts I, II and III).

Since the last update in our series, what has happened? In the markets, stocks have been on a tear all around the world. The S&P500 has continued to go straight up since it bottomed in March:


Gold has again breached $1000 and is threatening to take out its all time high. The one year chart for GLD, the Gold tracking ETF, still looks more impressive than the S&P 500:


The US dollar is crumbling, with the dollar index down below 80 and threatening to take out its all time low:


If one were to guess, based on the above charts, in which direction US treasury bonds have moved over the same time frame, what would it be? Down, right? You would be thinking reasonably and logically. You would also be somewhat wrong. Ten year treasuries have consolidated some, for sure, but to the extent that one would expect given other market developments. The trend going back to late last year is still up:


For now, the connection between treasury bonds and trade wars has weakened. We don't think this will last much longer but no one knows for sure.

On the global trade front, as we have predicted, protectionism has continued to increase. In July the EU implemented tariffs on Chinese made steel pipe. And then today rumors were confirmed when the White House announced that tariffs on Chinese tires would be enacted. This is being labeled as the first major trade enforcement action implemented by the Obama administration. The Chinese are none too thrilled and have already responded:

The U.S. violated rules of the WTO and the tariff imposition is a breach of the commitments made by the U.S. at the Group of 20 summits, the [Chinese] ministry said in a statement posted on its Web site, citing spokesman Yao Jian. The move will harm both countries’ interests and produce a chain reaction of trade protectionism, slowing world economic recovery, it added.

This Chinese official fears the same thing that we do. Tariffs tend to work in a tit-for-tat fashion and China is now prepared to tat. One can debate the reason for it, but the global economy has picked up slightly over the last few months. If the recovery continues, increased pressure for tariffs will probably wane. If the recovery stalls or even fails, however, we will be seeing much more of this type of activity. Struggling industrial concerns will continue to pressure their elected officials to "save jobs" and implement tariffs.

We are of the opinion that the recovery is simply freshly issued government money flowing into all aspects of the global economy. The performance of stocks, for sure, has been impressive but global trade has still not picked up to levels one would associate with a real economic recovery. We will need to see trade growth of over 5% with government deficit spending under 5% of GDP before we can feel confident about things. That is not expected to happen by anybody for quite some time.
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