Evercore Pan Asset

This week we saw a beleaguered Japanese Prime Minister hit back at his critics. He took their advice. The Japanese authorities started selling their own currency in an attempt to drive its value down. The high and rising yen was threatening to cool Japan’s successful export industries too much.

The US and UK authorities have implemented substantial programmes of so called quantitative easing – money printing to you and me. They were happy to see their currencies fall, as they recognised the need to correct large balance of payments deficits.  Devaluation might help.

The Chinese run a managed exchange rate. Their critics around the world think the Chinese yuan is too low. The Chinese authorities talk about a managed float upwards, but are in no hurry to carry it out.

The Euroland authorities engineered a devaluation during the intense phase of the Euro crisis over Greek, Portuguese and Spanish debt. They saw the need to allow some of the painful adjustment to take place through lowering the value of the currency, as the Latin members of the zone struggled to pay their debts in strongly valued currency, and struggled to export around the world.

The globe is indeed upside down. Previous currency crises have seen Central banks and governments battling to avoid the inevitable devaluations. Today all the main currency authorities are either actively trying to get their currencies to devalue or are relaxed if they do. It’s the new reality, alongside near zero official interest rates, the mass purchase of government bonds on tiny yields and very low inflation in Euroland, the US and Japan.

Wanting competitive devaluations is the new protectionism. It would be good if markets could be left to sort out sensible values for the yuan, dollar, Euro, yen and pound. It would be naive to expect that to happen. Market levels of currencies will always be very influenced by the level of interest rates, set by the authorities, by the monetary policy generally and by the fiscal policy of the home government. These are highly sensitive matters that invite government intervention.

The underlying problem is too many people chasing too few jobs. The German, Japanese and Chinese economies are still very dependent on big export sectors, amassing large surpluses. They then have to lend money to the US, UK and southern Euroland states, the large importers and borrowers, to keep the system functioning. It is not stable, and cannot deliver devaluations for both the importers and the exporters, both the lenders and the borrowers. Someone has to allow their currency up.

The ideal answer is for Germany, Japan and China to take action to expand their domestic demand and to import more. Germany of course cannot revalue without intensifying the problems for weaker Euro members. The southern EU states, the UK and to a lesser extent the US are certainly curbing domestic demand as they try to wrestle their debt down, and need to export more. China did help the world a lot with its big monetary and fiscal stimulus. They now have to take action to restrain inflation. Their big increase in imports was better for commodity producers than for manufacturers.

We said a couple of weeks ago we thought the markets had overdone the gloom. There was no immediate double dip in sight. Today we say the markets should be careful not to overdo the relief at some modest growth. The large imbalances between east and west, and between savers and borrowers have not yet been resolved. They cannot all devalue. We must beware the new protectionism.  If you have spare cash corporate bonds look reasonable value again, within a balanced portfolio.