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Tableau in Toronto: the G20 Shifts Gears

Shawn Baldwin of CMG discusses the agenda and actions of the G20 Summit and what it will mean for the markets.

 

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The G20 Summit will begin this Saturday in Toronto having been preceded by the G8 meeting currently being hosted somewhere in the Canadian countryside. This summit has risen in importance because it is now clear that the power and focus has shifted from the United States as emerging market countries take center stage.

In my April 2009 commentary, paragraph 3 of “The Global Trade”  //www.fastcompany.com/blog/shawn-baldwin/financetrading-and-global-capital-markets/global-trade, I expounded on the fact that the emerging markets would accelerate in value and importance–and that the focus would shift from the US. I also stated that a harbinger of this would be the reluctant reduction of rates by the ECB (read as Jean Claude Trichet, President of the ECB and the 20th member of the G20)–I wrote that this would dramatically shift power to the emerging markets in paragraph 9 of the aforementioned commentary. I reiterated this sentiment paragraph 2 of the May 16 2010 commentary “Euro Crash”  //www.fastcompany.com/1648362/euro-crash  Those chickens have now come home to roost.

The Group of 20 (G20), was created in 1999 and is composed of industrial and emerging nations with a focus on cooperation between countries. Unlike the OECD (Organization for Economic Co-operation and Development) the G20 has no staff and it has a rotating Chairman. The group works in concert with the European Central Bank (ECB), International Monetary Fund (IMF) and the World Bank. The member countries in composite represent 90% of global economic input and approximately 80% of world trade. The combined populations of the member countries represent 2/3rds of the world’s entire population.  After reviewing those facts and sizing up the agenda, I couldn’t think of a more appropriate title than ” Tableau in Toronto”. Given that one of the definitions of tableau n. pl. tab leaux or tab leaus (tab’ loz’, ta-bloz’) is a striking incidental scene, of a picturesque group of people. I believe that this is the probably most apropos title, since I cannot think of a more notable, austere assemblage of important people. I’m sure that the august body of G20 Ministers agree with this tenet as well. 🙂

This G20 Summit is now the main forum for international economic policy debate and actually supercedes the G8 in importance (although it lags in efficacy of being able to get things done due to it’s unwieldly size), the end goal is to create economic stability and growth with effective fiscal policy and cooperation.

The topics of import on the agenda in Toronto will be the following:

1) Bank Levies 

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2) Rebalance of the Global Economy

3) Debt (austerity measures)

4) Global Trade Imbalances

5) Regulation (read as coordination)

6) Fiscal policy 

 

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BANK LEVIES

The bank levies proposed by Britain, Germany, and France prior to the meeting underline a key issue that many have with the G20–it is highly fractionalized with some members seemingly being more important than others.This serves to detriment efficacy and involvement and leads to in fighting which undermines the focus on cooperation. In depth focus on what these (3) three are doing respectively is the following: a)Britain has been the most vocal with its austerity measures led by Mr. Cameron. b)Germany was first into the fray as Ms. Merkel is completing her bank tax bill in time for the summer as she aggressively seeks to protect Germany’s interest and will begin spending cuts much to the dismay of President Obama. c)The embattled Mr. Sarkozy will not present a bank levy until 2011 after he heads to parliament this fall while he  wages a war against the anti-sentiment building against him–notably Canada, Japan and Brazil are against such measures. The Merkel-Sarkozy faction is leading the charge for greater taxes and regulations of investment firms, look for them to continue to grind that axe.

GLOBAL ECONOMY, DEBT, TRADE IMBALANCES

The rebalance of the global economy is of paramount importance and one of the reasons that the group was created in the first place. The G20 played a huge role in stifling the global financial crisis in 2008 by working in coordination. A key issue is the debt of the sovereign nations and their perceived weakness, expect heavy discussions on austerity packages as the group tries to meld the Keynesian policies with the external realities of many different cultures( i.e. Spain and Greece). At the heart of the matter is that several countries (led hands down by the US) are borrower countries while others enjoy severe trade imbalances–part of the central tenet is to address trade imbalances which hamper global growth as they will drive exports consumption up.

REGULATION & FISCAL POLICY

The terms of regulation will be bandied about but as I stated in paragraphs 9 and 13 of “The Global Trade” these are more lofty aspirations and announcements and less rooted in reality,when you review that actual process for enforcement in practicum. So the group will have to focus on effective coordination to eliminate regulatory arbitrage. Look for the UK to lead this battle call because they don’t want to see The City lose its competitiveness as a financial centre. The group will also focus on fiscal expansion as they have been doing to continue to reduce the effects of the global recession–this will be a little difficult since the coordination of fiscal expansion would seem to lie in opposition of individual national interests. This will ultimately determine the effectiveness of the group in the future, since a group and not factions are needed to make these meetings influential and far beyond pomp and circumstance–remember previous policies have led to our current  problems so “Fiscal Folly” is a real risk.

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What does this all mean?

You can expect continued sharp arguments between the US and Europe in terms of stimulus and budget cuts. US-China friction is also to be expected and this will not be completely eased by the highly political and symbolic elimination of the 2 year peg of the Chinese Yuan to US Dollar–that just reduced the volume of screaming. The United States will still push China to move the artificial imbalance of the Renminbi with the hopes of increasing demand since the effect on the yuan will be practically imperceptible in the short term.

A stronger yuan means that Chinese goods become more expensive and that eventually the Chinese will export jobs to other less expensive places, this will simultaneously make goods elsewhere less expensive and drive up imports. Over 20% of exports are to China so this is incredibly important. Investors initially read this as a bullish signal and markets responded very positively. Currencies in particular have been ablaze since the announcement as I predicted in 3rd paragraph of May 6th 2010 market commentary, “Market Chaos!” //www.fastcompany.com/1639874/market-chaos-the-9985-point-drop-and-the-mechanism-explained this trend will continue and greater opportunities will abound as exchange rates will fluctuate greatly.

Look for extensive comments on fiscal policy as banking risks and sovereign risks not only parallel each other but move closer in proximity to one another–which means that there will not be a clearly communicated exit strategy any time soon nor should we expect them as these exits won’t begin in earnest until 2011. This means that the US will continue prodding Germany to ramp up stimulus in the hopes of continuing Keynes policies to aid recovery through governmental stimulus, something that Ms. Merkel is adamantly against.

The global financial crisis was stymied with effective coordination of quantitative easing by the G20. The exits will not be nearly as coherent or unified and will lie along national interests. This will create tremendous volatility in the currency markets. Countries will most assuredly move to put taxes in place such as the “Tobin Tax” on financial service firms pre-emptively so that they can benefit from a profit/tax windfall. Ms. Merkel and Mr. Sarkozy have been hard at work at this already with their global financial tax agreement. Look for more stringent rules on bank liquidity and tier capital ratios

The ramifications of the actions of the G20 will affect the marketplace more dramatically in the future than they have in the past as the world still continues to strive for a dollar alternative/reserve currency in earnest. It may prove that Toronto is indeed an apt place for this meeting since given the demise of the euro, the Loonie seems to be looking stronger as that alternative. Until that is definitive–look for gold to continue to push higher as I stated in Global Trade and reiterated in Market Chaos. I wrote that gold would continue to push higher and that has held true–look for that trend to continue in the short term. Prepare for a key shift in G20 mantra and look for post Keynesian era policies which have pushed the world into an increasing sovereign debt crisis. Simply stated: less stimulus and more cuts as America’s influence wanes since we will no longer be the buyer and lender of last resort. This is frustrating Prez O but one factor that wasn’t considered as everyone was convinced to pursue government stimulus was that a number of the participating countries were already over leveraged. Fiscal policy will be more important than ever before and now everyone knows it.

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About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago.

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