Plaza Accord 2.0: Is It Coming? Is It Here?

Tyler Durden's picture Submitted by Tyler Durden on 10/14/2010 11:06 -0500

Ben BernankeBudget DeficitCentral BanksCRBEquity MarketsFederal ReserveGreat DepressionGross Domestic ProductHank PaulsonHyperinflationJapanManaging MoneyPrecious MetalsSwiss FrancYenYuan

Submitted by Michael Krieger of Kam LP

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The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.

Experience teaches us to be most on our guard to protect liberty when the government’s purposes are beneficent.

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– Quotes by former Supreme Court Justice Louis Brandeis

Is Plaza Accord 2.0 Coming?

On the fringes of the typical daily news blitz in which I fully immerse myself, I have noticed heightened chatter about this concept that we may be on the cusp of some sort of “Plaza Accord 2.0” type agreement between governments and central banks globally.  I feel the need to address this because I do indeed think that some sort of informal or unspoken agreement of this nature may already have been agreed upon behind the scenes.  First, just a quick recap on the first Plaza Accord. 

The Plaza Accord was signed on September 22, 1985 and it consisted of an agreement between the major Western economic powers at the time  (including Japan) to devalue the U.S. dollar relative to the Japanese yen and the German Deutsche Mark.  The trade backdrop was similar in many ways to today.  According to Bloomberg the current account deficit as a percentage of GDP in September 1985 was -2.59% and today it is -2.96%.  While many have pointed out the similarities, I want to make it very clear that I believe the structural, social and political environment in the United States right now is multiples worse of what it was back then.  One statistic that I think is worth mentioning is the budget deficit as a percentage of GDP.  The latest available data here is for June 2010 when it stood at a banana republic -9.1%.  In September 1985 it was -5.0%. 

So what would a modern version of the Plaza Accord look like.  I have been writing for several years now and since before the economic crisis that a major dollar devaluation, while not a good thing for the country, had become inevitable.  The debt and spending that has been piled on since the crisis to “avoid another Great Depression” (give me a break we are in it) has only compounded the situation and makes an even larger devaluation a certainty.  The reason why I think the chatter of a Plaza 2.0 is so compelling right now is because we have only two choices left.  We can devalue in a disorderly and completely chaotic fashion, or we can agree to do it in a more measured and sane manner.  A massive QE2 program would be the chaotic choice and would lead to total and complete monetary and economic destruction throughout the world.  This is what people have been referring to as the currency wars.  I actually think that Bernanke’s threat to QE2 to infinity has scared some of the emerging market leaders and central bankers straight; as it should.  At this point it is in everyone’s best interest to come together and say ok, the dollar needs to be devalued but it needs to be devalued versus all major currencies more or less simultaneously.  The truth of the matter is this.  With commodities surging and the CRB RIND Index (the spot price for 22 sensitive basic commodities) at an all time high, the booming economies in Asia and elsewhere in the emerging world are experiencing horrific inflation that is much worse than the official statistics demonstrate and this creates an environment where currency appreciation is a necessary tool to keep prices under control.  The BIG problem here is that they are wary to allow significant strengthening as long as the yuan remains static.  No one wants to devalue while China sits there and does nothing.  On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride. 

This is where a new Plaza-type agreement comes in.  If all countries can decide it is in their best interest to collectively allow market appreciation for their currencies versus the dollar then everyone can probably live with that.  It is certainly better than an all out currency war where each Central Banker yells my printing press is bigger than your printing press.  Listen, no one’s printing press is bigger than Banana Ben Bernanke’s and I think the world is starting to figure that out.  This brings me to an even more interesting point.  Has the G20 already agreed to such an arrangement informally?  While the financial press was abuzz with articles that nothing came of recent meetings, can we believe this at face value?  Look at various currencies versus the dollar.  In the OECD, look at the yen, the Swiss franc, and even the euro for crying out loud.  In Asia, look at the Thai bhat, the Indian rupee, the Korean won.  Look a the Singapore dollar last night!!!  Even the yuan is moving and appreciated by 0.20% versus the dollar overnight.  See the yuan/dollar chart below.

One Year Yuan Chart

So What Does this Mean?

I am about to do something that I never myself expected to do.  I am going to give Bernanke the benefit of the doubt on the recent QE2 chatter.  What if it was all just a threat to other nations to act on their currencies?  What if he was merely bluffing to blast the dollar into oblivion in an attempt to get other central banks around the world to give in to the concept of dollar devaluation?  At the end of the day, this was probably not his intent because all the evidence shows that the Federal Reserve have no comprehension of how markets really work and how their participants really think.  Nevertheless, whether it was his intention or not is irrelevant.  The endless chatter of QE2 did indeed send a shiver down the spines of the rest of the world and their currencies have been appreciating consistently as of late.  This brings me to two important points that I think the market has failed to appreciate.

The first is that the Fed may be likely to do LESS not more at its November 3rd meeting.  An announcement of $500 billion let’s say in QE2 at this stage in my opinion is the equivalent of no QE2.  Furthermore, I have noticed that my general fears on Zimbabwe, fiat money, hyperinflation which I have been harping on for the last two years has gone mainstream.  The conclusions do not seem to be particularly thoughtful however.  The markets are rallying as if the dollar will be totally destroyed in the near-term and I don’t believe this will happen because the world has too much to lose.  Rather there may be a somewhat orderly but significant broad-based dollar devaluation.  There is this notion in the markets that this is good for equities in general.  I disagree completely.  Take a step back and think of the U.S. economy for a second.  The economy is still dominated by consumer spending and a financial system that survives on creating ponzi schemes that investors buy in search for “yield.”  This then takes me to the two sectors I think have the most to lose in the scenario we are entering.  Financial services (especially the bailed out TBTF guys) and retail.  As the dollar is devalued and imported goods become prohibitively expensive due to the direct currency effect as well as the costs to ship things (fuel anyone?) we will source more of our consumption locally as well as the input costs.  Capital will allocate in a more efficient manner to manufacturing and away from ponzi finance creations.  Financial services has had a great run in dominating the U.S. and this was unfortunately extended thanks to cronies like Hank Paulson but the gig is up.  Then there is retail.  You have got to be kidding me on this sector.  Again, retail has benefited from a business model where they outsource cheaply from abroad and sell to a consumer that spent beyond its means.  None of this works in a dollar devaluation scenario.  People are buying into this sector because of some LBOs and a vocal hedge fund manager taking stakes in companies.  Give me a break.

So this brings me to the conclusion of this piece.  I believe the equity markets are pricing in near-term QE to infinity and I do not think this will necessarily happen.  Even if it did, I am not convinced stocks broadly would go up on this.  My major advice to anyone managing money is to dump the loser sectors like financials and retail and move into sectors where the secular growth will be in a dollar devaluation scenario.  For me, that is primarily in companies that produce globally traded commodities.  I continue to think increased relative exposure to oil, agriculture and precious metals are the most attractive areas.  Later on, manufacturing will join this list.  I believe the best way to play any potential market sell-off is to bet against the financial and retail sectors specifically.  While many will call the world we are entering de-coupling again, it’s really more like de-valuation. 

All the best,
Mike

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by SheepDog-One
on Thu, 10/14/2010 – 11:11
#649500

Too much economics-only concentration and macro economics textbook consulting, look beyond to whats actually taking place. Planned 1 world govt 1 world currency. Anyone actually believes theyre trying to pull back the stick out of this dive is crazy. Its exactly what TPTB planned.

Login or register to post comments by tahoebumsmith
on Thu, 10/14/2010 – 11:39
#649594

Exactly..this is why deficits don’t matter….Planned 1 world govt 1 world currency…Don’t forget that the USD is still considered the world’s reserve currency…And once they have collapsed it to nothing it will be time to bring in the new… just like that..POOF… the world’s debt will be reset equally across the board.

Login or register to post comments by Andrew G
on Thu, 10/14/2010 – 11:14
#649508

To help you visualize what Plaza Accord 2.0 would look like – http://www.flickr.com/photos/airojo/3492821441

Login or register to post comments by Turd Ferguson
on Thu, 10/14/2010 – 11:16
#649514

You know, I would be inclined to go along with Mike on this. However, his conclusion is based upon the premise that CBs can still “control” exchange rates. The CBs have lost that ability as the forward-thinking global flow of trillions of dollars frontruns every Fed move.

Lets say a “Plaza Accord” is announced. Does anyone seriously think that the new fx targets wouldn’t be completely priced in within 24-48 hours? Then what? Plaza Accord 3.0?

No, our delusional, Keynesian masters still don’t get it. All fiat are dying. The only question is how quickly.

Login or register to post comments by Yikes
on Thu, 10/14/2010 – 11:24
#649537

But thats just it. The CB’s are trying to fight what the market wants to do naturally: devalue the dollar.  China is the fly in the ointment.

Login or register to post comments by Yikes
on Thu, 10/14/2010 – 11:23
#649539

delete double post.

Login or register to post comments by bob_dabolina
on Thu, 10/14/2010 – 11:16
#649515

Is Bob Pisani reporting inflows into the financial sector yet?

Login or register to post comments by TheJudge2012
on Thu, 10/14/2010 – 11:19
#649528

“In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen
and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.”

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar…

Login or register to post comments by trav7777
on Thu, 10/14/2010 – 11:34
#649573

this would never work.  Nations would be too likely to print into the basket to get oil.

China can’t let its currency appreciate or else there goes its export ponzi economy

Login or register to post comments by CPL
on Thu, 10/14/2010 – 11:40
#649601

It more than likely they will enter into the next agreement that that oil turns into food.  As long as deserts and overpopulated regions of the world continue to ignore food > oil then we’ll see something that the world has seen only a handful of times in history, usually barely understanding what the impact really means.  We’ll more than likely have a human population collapse right as the ink dries for oil bread basket economies.

 

Basically we’re going back to 1880 for a while and staying there.

 

Steampunk is the future.

Login or register to post comments by B9K9
on Thu, 10/14/2010 – 11:27
#649550

Please, I beg of you, stop with the QE shit. Until someone can demonstrate that a weaker $USD and/or global basket of currencies measured against critical commodities (hmm, “oil” anyone?) help in any way, shape or form towards supporting the MIC’s objectives in controlling ME oil supplies, then it’s all just so many electrons blowing in the wind.

The bottom line is that the USA is a global empire geared towards exploiting others so that we, the American citizen, can enjoy a life-style far in excess of what we “deserve”. (And ain’t it awesome, bitch!) But we need a functioning economy, bubble or otherwise, in which to fund these far-flung operations.

Ben ain’t the man in charge; Petraeus is. Clue in or keep wasting bandwidth.

Login or register to post comments by Shameful
on Thu, 10/14/2010 – 11:37
#649583

So no QE.  Who will buy our debt?  I remember China pointing out that the trade deficit does not make enough dollars worldwide to buy the debt.  So where will the dollars for the debt come from, and at these rates?  Now if the plan is a radical increase in rates sure that might work.  Though the fireworks of a massive rate hike in treasury yields would blow a lot of people out of the water and make the deficits ridiculously unpayable.

I’m just not seeing the scenario where there is no monetizing and the framework holds together for any length of time.  I have to ask what keeps the wheels on the cart the longest?

Login or register to post comments by doolittlegeorge
on Thu, 10/14/2010 – 11:28
#649553

GLD young man.  GLD.

Login or register to post comments by Dagny Taggart
on Thu, 10/14/2010 – 11:30
#649561

The first is that the Fed may be likely to do LESS not more at its November 3rd meeting.

Um…POMO 1.3 begins tomorrow through November 8. http://www.newyorkfed.org/markets/tot_operation_schedule.html

In addition, I have seen more promotional Fed speak in the past two weeks than ever before. I think the Fed Govs have had more time in front of the cameras than Obama. Almost like they got a hotshot new PR team. It does not appear the Fed is doing less at all.

 

Login or register to post comments by Shameful
on Thu, 10/14/2010 – 11:31
#649564

Would a Plaza 2 even work? How orderly would it be, after all anyone who wants to can start trading on the 4x. Hell what about Treasuries? How will the appetite be for them while there is an official ongoing devaluation? Or would Bennie and the Ink Jets just keep buying any and all offerings? Also should point out that historically the Plaza accord was to much of a success.  What are the odds they will pull off a Louve Accord 2.0?

Also what about China? Plaza seems like it put the sting on Japan, is Chian worried about that?

Login or register to post comments by DosZap
on Thu, 10/14/2010 – 11:32
#649568

What would this do to PM’s, if instituted?.

Bottom drop out, or more, faster upside?.

I am confused.

Login or register to post comments by stormsailor
on Thu, 10/14/2010 – 11:35
#649576

i belive we are in the final phase now.  parabolic blow-off of commodities.

i’ve prepared for the worst, but i don’t know how much good it will do,  i don’t think i, nor anyone else can forsee what is rapidly approaching.

 

Login or register to post comments by chinaguy
on Thu, 10/14/2010 – 11:36
#649579

On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride.

 

China ain’t gonna play (or play by “the rules”) & you can bank on that.

Login or register to post comments by Yikes
on Thu, 10/14/2010 – 11:44
#649620

No they won’t play along. 

I keep thinking: Why not kick them out of the WTO?  Oh yea, WWIII, that’s why.

Login or register to post comments by bronzie
on Thu, 10/14/2010 – 11:44
#649617

all the currencies will be revalued relative to gold whether it happens in an orderly or chaotic fashion

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