The G20 conference 5 comments

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And so, after half a year of waiting, finally the G20 meeting convenes this coming week. Will it be another NATO (No Action Talk Only) meeting ie. an anticlimax yet again?

I tend to think that this will come to be seen as a key event in the annuals of financial history, because of a few factors: (1) it has been six months in the making, which gives various participants the time to think things over and lobby for support; (2) the economic collapses following the Lehman bankruptcy have confounded even the most pessimistic estimates, hence conferring the political impetus for drastic action; (3)long-standing economic imbalances have long been recognised and this is the best opportunity, amidst a crisis emanating from such imbalances, to "upside the downside" (to quote a famous saying from our of our most articulate local ministers).

I believe there will be a few key issues on the agenda as described below, together with the market implications:

(1) Coordination on fiscal spending by all countries. Related to this is the issue of protectionism. For example, countries like Singapore are dead scared of too much fiscal spending because of the fear that much of this money will leak overseas due to our high exposure to global trade. Even mighty Germany doesn't want to end up subsidising the exports of EU member countries. Without global coordination along the lines that each country pulls its own weight in fiscal stimulus such that countries will not end up accusing each other of benefiting from the other's fiscal stimulus, a classic prisoner's dilemma situation could develop where all parties, in trying to protect their own self-interests, end up all losers. If this coordination works, I would expect protectionism fears to ease and trade-related companies to benefit, particularly commodities (which are needed for infrastructure construction).

(2) Greater regulation of the global financial system. This is being championed by the Europeans (my suspicion is that they're pushing this as the top agenda item because they cannot afford to pay for massive fiscal spending like the Americans). Already we're seeing the imminent clampdowns on tax havens and bank secrecy. Most likely hedge funds, with their massive clout unsupervised by any agencies, will get the next round of scrutiny. Greater transparency of OTC markets involving all kinds of derivatives that have caused great uncertainty will be next. The implication: the financial industry will never be the same again. Therefore, rid your portfolios of all banks. The new index heavyweights will be utilities, back to the good old days. Another word of advice: Singapore should really beware of changes in this arena, because we have positioned ourselves so much for the financial industry, in particular wealth management, in recent years. Monumental changes in banking secrecy and tax haven laws will affect our fortunes greatly.

(3) Perhaps the most monumental changes will come in the currency arena. As mentioned, global imbalances triggered the current crisis. The key one is the huge US current deficit due to continuous importing of goods from exporting countries like China, which generate trade surpluses on the other end. This has been sustained by continuous funding of these deficits by the exporting countries, thus resulting in the ironic situation of poorer developing nations lending to a rich developed country in a gigantic parody of vendor financing. It has become clear that the US can no longer be the ultimate demand sink that it has been for the past two decades. Silvio Berlusconi talked of a new Bretton Woods several months back when this G20 meeting was being planned. I also think back to the 1985 Plaza Accord when the US dollar was devalued against the Japanese yen in order to reduce its current deficits and assist its economic recovery. It does look like adjustment of economic imbalances will begin and end with currency adjustments this time round again. I believe talk will centre around (1) a new reserve currency (with China and Russia now clucking about it); (2) new currency pegs that will assist in the rebalancing of global demand. The RMB will probably remain steady, but since it's currently still under capital control, there's no way things will develop too greatly for this currency.

The big gainer, in my view, will be gold. In Bretton Woods, it was used as a peg of value; once the system was "nixed" in 1971, gold was liberated and shot up to US$800/ounce. Now with currency displacements looming once more, we could again see interesting movements in real assets, in particular the original "reserve currency".

(4) Restructuring/recapitalisation of the World Bank and IMF. In recent years these two agencies have grown almost obsolete, mainly because of the stigma associated with accepting IMF assistance. But should SDR, or Special Drawing Rights, become an important reserve currency, these Keynesian brainchilds could once again enter the mainstream of global finance. They will also have to provide funds for an increasing number of emerging countries hit by the global crisis.

(5) The depth by which some countries have been hit by the economic crisis could become clear during the G20 meeting coverage. Striking examples would include countries in Eastern Europe, maybe even more developed nations like South Korea. Hence, one should look to exit positions in countries which one does not have much macroeconomic conviction on.

References:
(1) Bretton Woods
(2) Plaza Accord