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Currency tensions mount The currency cold war shows few signs of easing in the run-up to the G20 meetings in South Korea.
Germany and Russia are both expressing concerns about the Federal Reserve's $600-billion quantitative easing program last week, and President Barack Obama waded into the controversy today.
Germany's Finance Minister Wolfgang Schäuble launched a rare attack on U.S. policy, saying in a magazine interview that its credibility is being undermined and that "it doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."
Separately, Russia's negotiator at the G20 table said today that officials should consult the G20 before taking any such major decision.
And China's vice-finance minister warned, as have others, that the Fed decision could flood emerging market economies with money.
In New Delhi today, Mr. Obama pointed out that his administration does not generally comment on the day-to-day moves of the independent central bank but he did say that "the Fed's mandate, my mandate, is to grow our economy, and that's not just good for the U.S. That's good for the world as a whole."
- Russia wants Fed to consult G20 on big decisions
- Obama defends Fed actions
- Critics line up to attack Fed stimulus plan
- Progress may be slow but G20 leaders moving in right direction
A new gold standard? As the currency controversy intensifies, World Bank President Robert Zoellick is calling for a return to a modified gold standard.
Writing in The Financial Times, Mr. Zoellick said the world needs a new regime to replace the one that developed since the Bretton Woods system collapsed in 1971.
While his piece was much broader, it was this vague bit that set tongues wagging:
"Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account.
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."
Well-known professor and author Paul Krugman, blogging for The New York Times today, takes a dim view of Mr. Zoellick's idea. He notes the "steady slide" toward lower inflation, tracking Japan's slip toward "corrosive deflation," while gold is rising sharply.
"So put this together: doesn't this strongly suggest that we'd be facing very strong deflationary pressure if we had been on a gold standard?" Mr. Krugman writes. "Yes, gold demand is endogenous - it might be lower if you knew that the Fed and the ECB were securely bound by golden fetters. On the other hand, there would be a lot more demand for gold reserves.
"The question I'd ask is, what problem does Zoellick think gold would solve?"
In a discussion of gold prices today, Capital Economics calls speculation of a return to some for of the gold standard a "red herring."
"Whatever the merits in theory, which are debatable, it is inconceivable that policy makers would want to tie their hands further," Capital Economics said. "Central banks in particular have worked hard to establish the credibility of simple (that is, easy to understand) inflation-targeting regimes. The addition of some sort of link to gold would not enhance these regimes."
The Reuters news agency provides a primer on the gold standard, reprinted below:
What is the gold standard?
The gold standard was effectively an exchange rate mechanism created in 1944 by the Bretton Woods agreement, ratified by the U.S. Congress in 1945. It involved setting par values for currencies in terms of gold and the obligation of member countries to convert foreign official holdings of their currencies into gold at those par values.
The system was set up to help rebuild the international economy as World War Two still raged. It required each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value (plus or minus 1 per cent in terms of gold).
This system remained in place until August 1971, when U.S. President Richard Nixon removed the dollar peg to gold, which had been fixed at $35 an ounce.
In its most basic form, the gold standard involves the issuance of coinage in gold.
A more sophisticated system involves paper currency that can be converted to preset, fixed quantities of gold.
Another gold standard allows for a specific amount of gold to be used as standard unit of account for settling terms of trade and so on.
How might a new gold standard work?
Mr. Zoellick's comments were vague, but analysts say he may be pushing for a system in which the World Bank's own currency -- Special Drawing Rights or SDRs -- is changed to reflect the value of the dollar, euro, pound, yen and the yuan and somehow incorporate gold.
The suggestion does not set out, for example, how such a standard might work when monetary authorities need to make extraordinary provisions such as quantitative easing or sterilised currency intervention.
It also does not make clear how it would prevent monetary authorities from trading around or outside of any bands that might be set.
Is it a realistic proposal?
The initial response, given the size of the gold market alone, is no. Gold is a precious metal by virtue of its limited supply, and annual gold supply could not keep pace with any increase in money supply, especially if central banks make use of quantitative easing to flush their economies with cash.
"Unlike the World Bank, we do not believe that a form of the gold standard will return. Very simply, there is not enough gold supply in the world for the metal to perform in this role," says UBS precious metals strategist Edel Tully.
Would the proposal gain international support?
Mr. Zoellick's suggestion that gold be used as an international reference point of market expectations for price pressures and future currency values comes in the middle of a virtual international currency war.
The U.S. dollar has fallen broadly this year, having lost nearly 13 per cent against a basket of major currencies in the past five months. That has triggered an outcry from many key emerging economies, which have seen the competitiveness of their exports dwindle as well as a pick-up in so-called 'hot money' inflows from speculative investors.
The United States continues to exert pressure on China to allow its yuan to appreciate and wipe out some of the competitive edge of the world's biggest exporter, and members of the G20 have rejected placing limits on currency and trade surpluses as a means of rebalancing the global economy.
With a distinct lack of accord over how to correct the surpluses of the emerging world and the deficits of the developed one, the chances of a deal on adopting a gold standard, in any form, appear limited.
"It is conceivable for greater cooperation in the currency region, but gold may not necessarily be at the heart of any realignment of the currency system," says Daragh Maher, deputy head of global foreign exchange research at Credit Agricole CIB.
"More co-operation, such as a (U.S. Treasury Secretary Timothy) Geithner-like approach, but not specific target levels (for current account imbalances) but something that would involve not tolerating imbalances domestically may be something to be considered," he says.
With the Federal Reserve set to pump over half a trillion dollars into the U.S. economy, the rise in money supply and subsequent rise in inflation would make it difficult to hold enough gold.
Hans Redeker, global head of foreign exchange strategy at BNP Paribas, says the supply of money would depend on the amount of gold one holds. So an increase in money supply would have nothing to do with economic circumstances.
"It's a step in the right direction, but it is not going to fly. People are desperately seeking ways to stem the wave of liquidity (from U.S. monetary easing), but bringing back the gold standard is not realistic," he says.
Mr. Redeker adds that throwing gold into the global currency mix would not help stem excess liquidity by the United States, which is fuelling inflation especially in China and emerging Asia.
OECD sees diverging economies Like other evidence, the OECD's leading indicators suggest divergence in economic growth around the world.
The OECD said today its latest findings point to "continuing expansion" in Germany, Japan, the United States and Russia, though a "moderate downturn" in Canada, France, India, Italy and Britain.
Housing pricey but no bubble seen Canada's housing market is moderately overvalued but not a bubble waiting to be burst, BMO Nesbitt Burns says.
"All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse," economists Earl Sweet and Sal Guatieri said in a research note.
"A key and overriding difference is the quality of loan origination in the past decade, as well as other institutional factors such as mortgage insurance and recourse against defaulters," they wrote in the report titled "Canadian housing: Pricey, not dicey."
THe Economist published a report recently that indicated Canada's real estate market is overvalued to the tune of 24 per cent. The magazine used a measure that compares home prices and rent, whereas comparing prices with personal income is a "superior methodology," Mr. Sweet and Mr. Guatieri said.
Using their method, they found prices peaked, in terms of overvaluation, at 18 per cent late last year. But a 3-per-cent drop in prices so far this year, along with moderate income growth, cut that to "a less worrisome" 11 per cent in the third quarter.
"Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble," They wrote. "Instead, Canada's housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize."
The BMO study comes as Canada's mortgage market tops $1-trillion for the first time, Globe and Mail real estate reporter Steve Ladurantaye writes today.
Housing starts fall There are more signs today of the cooling housing market.
Canada Mortgage and Housing Corp. says that housing starts fell in October to 167,900 units, at a seasonally adjusted annual pace, driven down from September's 185,000 largely by softer single urban starts.
"The moderation in housing starts in October, from relatively high levels earlier in the year is consistent with CMHC's forecast for 2010 of 184,900 units," the agency said.
"Looking ahead into 2011, housing starts will gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year."
The 9.2-per-cent fall in October marked the third consecutive month of weakness, noted Toronto-Dominion Bank senior economist Pascal Gauthier.
"Up until October, headline housing starts figures showed very gradual cooling in activity over the previous five months," Mr. Gauthier said.
"But, this masked a stark dichotomy in trends by unit type since the spring of 2009. Since then and up to September, starts of single-detached units had fallen by 39 per cent, while multiple unit starts had moved up by 29 per cent.
"While the former comes as no surprise as the resale market cooled considerably, the uptrend in multiple units had been more of a head scratcher. Multiple unit starts made up 60 per cent of total starts over the last four months, well above the average 50 per cent since 2000. "
Chrysler boosts outlook Chrysler Group LLC is looking forward to even better times.
The U.S. auto maker today posted a loss of $84-million (U.S.) for the third quarter, narrower than the $172-million lost in the second quarter, and it boosted its outlook for the year. Excluding certain costs, its operating profit was $239-million and its revenues just above $11-billion.
Most importantly, Chrysler now expects an operating profit of $700-million this year, well up from its earlier forecast.
"A year ago, Chrysler Group laid out clear and concise five-year financial goals and after three consecutive quarters of better-than-forecasted results, we are not only living up to our commitments, but we are also exceeding our 2010 financial objectives," said chief executive officer Sergio Marchionne.
Market rebound strong With the markets in the middle of a crucial earnings season, it's worth noting that the TSX has made an impressive comeback from the depths of March, 2009, retaking the levels seen before the collapse of Lehman Brothers. That's strong, but not record breaking.
Questioning whether "excessive exuberance" could create risks down the road, Peter Buchanan of CIBC World Markets noted that while the current climb back has been much faster than the five-year recovery from the 2000 technology bust, it's still shy of the rapid rebound at the end of the brutal double-dip recession of the 1980s. Then, the TSX roared back from a 44-per-cent loss in nine months.
Mr. Buchanan also pointed out in a research note that this week and last are key for TSX-listed companies reporting quarterly results, which so far are doing well.
"The Canadian reporting season appears, like the one stateside, to be off to an appreciably better-than-average start," Mr. Buchanan said. "Last quarter, 53 per cent of TSX Composite members beat the Street's expectations. By contrast, nearly 70 per cent of the 108 firms that have reported so far this quarter have topped the consensus.
"The non-bank financials, industrials and consumer staples groups have had the largest proportion of firms eclipsing expectations. Nearly 60 per cent of energy firms have also topped expectations despite pipeline outages and the gravitational pull of low natural gas prices."
Several major companies report results this week, including Tim Hortons Inc. , Canadian Tire Corp. , Shoppers Drug Mart Corp. , Quebecor Inc. and Petrobank Energy and Resources Ltd.
Clement aims to beef up foreign reviews Ottawa is looking to toughen up its foreign investment rules in several areas, Industry Minister Tony Clement says.
After rejecting the hostile bid for Potash Corp. of Saskatchewan by BHP Billiton Ltd. , Ottawa said it would review the Investment Canada Act.
Mr. Clement went somewhat further in an interview with The Financial Times, telling the newspaper that the government wants to forece foreign investors to make their commitments on jobs, local processing and technology transfers, among other things, public.
Ottawa also could look at ways to boost its enforcement actions of commitments made by companies taking over Canadian interests, he said.
"If there is a delinquent investor, let's talk about ways that we can advance Canada's interests in those cases," Mr. Clement said.
"This may further raise the hurdle on foreign acquisitions of Canadian companies," Scotia Capital added in a research note today.
- Potash: The deal that didn't have to die
- Read our complete coverage of the battle for control of Potash Corp.
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