Wednesday, September 9, 2015

International Reserves: Another Sign of Global Slowdown (excerpt)

Not surprisingly, there is a strong inverse correlation between the yearly percent change in total non-gold international reserves (in dollars) and the trade-weighted dollar. The former is down -4.5% y/y through June, while the latter is up 12.3% over the same period. That’s because roughly 35% of these reserves are held in non-dollar currencies.

It turns out that the yearly percent changes in the CRB raw industrials spot price index and in total non-gold international reserves are also highly correlated. The index is down -13.2% y/y. This suggests that some of the weakness in reserves is directly related to the end of the relatively short-lived commodity super-cycle, which wasn’t so super and turned out to be the latest speculative bubble that has burst.

Commodity-producing countries, especially among the EMEs, are obviously taking big revenue hits in dollars, though those dollars are worth more in their local currencies. In any event, they are earning fewer dollars than can be accumulated in the local central bank’s reserve account.

In other words, causality runs both ways between global economic activity and international reserves. The recent weakness in reserves growth reflects some drying up of global liquidity. However, it also reflects the slowdown in world economic growth attributable to the forces of secular stagnation that I have previously discussed. They include the untimely death of the commodity super-cycle caused by excess supply, which has been facilitated by ultra-easy monetary policies, as well as the burden of heavy debt loads weighing on demand around the world, geriatric demographic trends, and disruptive technologies (automation and robotics).

The bottom line is that the IMF’s international reserves data are yet another measure of global economic activity showing a significant slowdown. Sure enough, the value of world exports was down -5.5% y/y during June, close to the decline in international reserves. But again, keep in mind that both of these IMF-compiled series are denominated in dollars, and have been depressed by its strength over the past year

Today's Morning Briefing: Global Liquidity Drying Up? (1) Short and long answers to liquidity question. (2) International reserves falling since July 2014. (3) Dollar remains the major international reserve currency, though less so than a few years ago. (4) Strong dollar depressing dollar value of euro and yen reserves. (5) Drop in reserves is a two-way street reflecting drying liquidity and secular stagnation. (6) Tiny tightening prospects already triggering tightening tantrum and unwinding of carry trades. (7) Bad for EMEs, but maybe good for USA. (8) China has a little less of lots of cash. (9) US labor market revisited and revised. (More for subscribers.)

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