G20 2010 Summit Could Spark An International Trade War
Last week was chock-full of potential market moving events. The mid-term elections, the latest job market numbers, and of course, the Fed embarking on their second round of quantitative easing… otherwise known as QE2.
For all the hype and build up, the payoff was a bit underwhelming…
Why?
By and large, the market got exactly what it was expecting.
The Republicans took back the House and made inroads into the Democrats majority in the Senate. Jobs were a little better than expected but still anemic. And the Fed promised $600 billion in new asset purchases.
Now, the G20 summit has “market moving” potential… and this one is more of a wildcard! So consider yourself warned…
Next week the annual G20 summit is taking place in Seoul, South Korea.
Before I get into all that, let’s take a step back. Who exactly are the G20?
It all started back in 1999. The 1997 Asian Financial Crisis prompted leaders from around the world to come together to stabilize the global financial market.
Since then, the head financial guys from the 20 largest developed and developing nations have met annually. Their goal is to promote global financial stability and sustainable economic growth and development.
The idea is international cooperation will lead to the betterment of all. It’s the old “all for one and one for all” bit.
This is where it gets interesting…
Over the last few months, tensions between China and the rest of the world have been building. American policy makers have been pressing China to let the value of the Chinese currency appreciate.
They say the low value of the Chinese Yuan makes their goods artificially cheaper than American manufactured goods. It’s an unfair trade advantage.
But here’s the catch…
With economic growth especially sluggish in developed nations, they are doing everything they can to give their economies a boost. One way they’re trying to boost the economy is by increasing exports.
An easy way to boost exports is to make their products cheaper in other countries. And the easiest way to make exports cheaper in other countries is to devalue their currency!
So countries have started a “race to the bottom”. Countries are racing to make their currency cheaper than their trading partners. This is a very slippery slope…
Brazilian Finance Minister Guido Mantega even called it an “international currency war”. He said, “The advanced countries are seeking to devalue their currencies in order to increase exports.”
In other words, the Fed’s QE2 is devaluing the US Dollar. And it has the heads of finance from other G20 nations riled up to say the least.
Here’s what the German Finance Minister said about it, “What the US accuses China of doing, the USA is doing by different means.”
And China’s Vice-Foreign Minister had this to say, “Many countries are worried about the impact of the policy on their economies. It would be appropriate for someone to step forward and give us an explanation.”
It sounds like the tensions could come to a head at the Seoul meetings.
If an understanding isn’t reached, the currency war could spill over into a trade war. We could see tariffs and taxes on foreign goods and investments.
It’s a slippery slope to isolationism… Simply put, in today’s globalized world, the results would be devastating!
The truth is I don’t think it will come to that. (But I’ve been wrong before!)
Here’s what you need to do if an understanding is reached and the currency devaluation is stopped. Buy American companies with large amounts of foreign sales.
Here’s why…
They’re going to crush their 4th quarter earnings and revenue guidance.
Remember, the US Dollar devaluation is a done deal. Nothing is going to change that now. It should keep the dollar “cheap” relative to other currencies. And provide a big boost to the top and bottom line of US exporters.
Don’t miss out!
If the international currency war comes to end next week at the G20 summit, American exporters will be the big winners next earnings season.
Category: Stocks
