Randomly Noted

It’s war!

War is a pretty strong word and one not often used in financial reporting. But there it is, over and over, the word war used in direct quotes and out of them. It’s the operative term to describe what is going on in currency markets.

We might be short of war, but clearly things have changed. Just today, the rhetorical level aimed at China’s mostly unchanging yuan is higher than before. And it’s been pretty high.

The U.S. Treasury Secretary, Timothy Geithner, still employs non-threatening words and won’t use China’s name. But, still… “When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same, and this sets off a dangerous dynamic,” Geithner said.

A Dow Jones Newswires headline this afternoon reads, “EU President: Europe Demands China Budge On Currency,” implying the comments earlier today of Chinese Premier Wen Jiabao in Brussels, in which he implored Europe’s leaders not to “join the chorus pressing to revalue the yuan,” fell on deaf ears.

Japan has intervened and the country’s central bank will launch more quantitative easing. The currency is still strong against the dollar. Chile has publicly worried about its too-high currency, as has Brazil.

Meanwhile, in the U.S., markets are reacting as if it is a signed-and-delivered deal that the U.S. Federal Reserve will embark on more quantitative easing of its own, knocking more starch from the weakened dollar. A distressing September jobs report, due for release on Friday, might be the final catalyst.

The world’s major nations have done a solid job since the start of the credit crisis and subsequent broad and deep recession of avoiding significant protectionist trade measures. It would be disappointing indeed to mitigate that necessary success with a no-holds-barred fight to gain advantage through weaker exchange rates.

It might not be up to China to stop all this, but some real rather than apparent relaxation of controls on the yuan by the Chinese government surely would help calm things down.

We met with Sergio Cabral, governor of the state of Rio de Janeiro today. The 47-year-old is a smooth pol who never goes off message. His message today was: A bill to redistribute oil royalties is unconstitutional, and unfair to Rio, which produces the lion’s share of Brazil’s oil. We’ll let Brazilian lawmakers duke it out in Brasilia – and in the press – as they have been doing in recent days. When Rio won the 2016 Olympics last year, I wrote that the related costs would saddle the city with massive debts and *white elephant* facilities. I still view this as a risk, with a caveat: If Cabral and his coterie deploy Rio’s wealth wisely, the city will turn a corner and become a livable and visit-able world-class city — offsetting any negatives associated with the Olympic games. Cabral himself is a bit of a cipher, but I felt reassured by the smart, worldly Joaquim Vieira F. Levy, a former national Treasury minister now serving as Rio state’s Secretary of Finance. I met Cabral and Levy at an “Invest in Rio” conference sponsored by The Wall Street Journal. Also interesting were some of the industrialists and public pension fund managers with stakes in Rio’s future – such as Fabio de Oliveira Moser, chief investment officer of PREVI, Banco do Brasil’s employee pension fund. He has money to deploy in Rio, and is scrutinizing commercial and residential redevelopment opportunities. One came away from the conference believing that Rio’s huge, decrepit port area will emerge as an attractive, thriving destination for tourists, not to mention locals; and that an ongoing effort to more effectively police the favelas is having the sort of impact that will genuinely improve the lives of the poor. It’s so hard to gauge the future of Rio from afar. But one has the sense that 1) Brazil’s robust 5% annual GDP rate — likely to continue for a decade, according to superstar businessman Eike Batista; 2) the burgeoning oil sector centered in the state of Rio; 3) this autumn’s national elections which will underscore democratic Brazil’s political stability; and 4) the World Cup and Olympic games in coming years – all of these factors add up to a real turning point for Rio de Janeiro. “Rio is becoming a garden of opportunities, said Moser. The dynamic, youthful Elvio Gaspar, director of BNDES, the Brazilian Development Bank, said Rio’s fortunes depend on a “regularity of growth” beyond a surge in Olympics-related economic development. This, Gaspar argued, can and likely will happen as long as the political class stays clean: “Any shadow of corruption will destroy our dreams.”

Brazil’s central bank meets today and there’s some sense it might raise interest rates for the first time since July 2008. Chances appear to be 50-50 based on what economists have been saying in the run-up to the meeting. But the fact that it’s even a possibility speaks volumes about Brazil’s economy and the potential for inflation – even as other major economies continue easing monetary policy (Bank of Japan just did so overnight.)  Win Thin at Brown Brothers Harriman argues, in fact, that the only reason NOT to hike rates is political: this may be the last meeting run by Henrique Meirelles, the central bank governor mulling a run for political office in the fall elections. Meirelles may not want to tighten liquidity ahead of a campaign. The pro-tightening camp points out that Brazilian inflationary expectations are rising – and the bank can’t wait too long to take action. Stay tuned!

Brazil’s central bank, worried about inflation and other symptoms of an accelerating economy, has raised banking reserve requirements on term deposits to 15% from 13%. Granted, Brazil’s economy isn’t expanding at a China-esque pace. But like China, which has taken monetary tightening steps in recent weeks, Brazil wants to prevent a bubble. Henrique Meirelles, central bank president, notes that bank reserve requirements were reduced during the 2008 economic crisis; now stimulus measures need to be reined in. The central bank took some other steps today to restore charges on cash and term deposits. Final data aren’t out yet but it’s believed that Brazil’s economy didn’t grow at all last year; this year, it’s expected to expand a robust 5.5%. We should all have such problems.

It was a mad final 10 minutes of trading today on Brazil’s stock market. The Ibovespa index hit its highest intra-day level since June 2008, breaking through the 70,000 mark, DJN colleague John Kolodziejski writes from Rio de Janeiro. Keep an eye on Brazil this year. When it comes to emerging markets, China tends to get most of the financial world’s attention – but a certain Portuguese-speaking, Latin American democracy surely offers interesting investing opportunities.

Brazil’s leftist president is admirable in many ways but his recent comments about Iran and Honduras are an embarrassment. Today, for example, Lula condemned the Honduras elections which brought a conservative politician to power on Sunday. But when pressed on the point, he refused to criticize the Iranian elections whose legitimacy remains in question and which spurred unprecedented popular protests that were brutally suppressed by the “elected” leaders. Lula, it seems, is happy to embrace Iran’s establishment despite its despotic tendencies. Yet when Honduran voters speak with their ballots, well, it’s illegitimate! “Those are two totally different things,” Lula told reporters during a summit meeting in Portugal. “The president of Iran ran for election and got 72% of the vote. You can have questions regarding the opposition speeches, but it was an election within rules that didn’t break the country’s constitution. You can’t compare that to Honduras where someone organized a coup that was rejected by all countries of the world.” It’s astonishing t0 think that the president of Brazil would give Iran’s religious and political bosses credit for adhering to some constitutional ideal while conveniently forgetting that Honduras’s incumbent president was poised to implement unconstitutional plans in defiance of that country’s court system – before the coup leaders stepped in. Lula’s pro-Iran positioning was on stark display last week when he embraced Iranian President Mahmoud Ahmadinejad, who was touring Latin America. Lula’s Chavez-esque posturing is beneath him – and Brazil.

… on General Motors, Opel and Germany’s Angela Merkel; Fiat and Chrysler; the future of luxury cars in China; and the generally sorry state of the global automotive market, circa 2009.  He also engages in some self-criticism about his time at Chrysler. Here are some tidbits from our interview with Daimler CEO Dieter Zetsche today in NY; the full text is on the Dow Jones Newswires. Also, here’s a video of a shorter chat with Zetsche.

INVENTORIES: Daimler’s inventories have never been as “cleared out” as they are now. He plans to maintain or even reduce the days of supply Daimler is carrying, even though he acknowledged that low stocks of Mercedes-Benz cars have had “some negative impact on sales” at certain dealerships.

THE EURO: The German company is planning for a year in which the euro, which accounts for a huge chunk of its overhead costs, remains as strong as it was this year, “which would be a major burden,” the CEO said.

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The notion that blue-eyed white men brought down the global economy is laughable, of course. (I refer to the recent comments of Brazilian political boss Lula). But my third trip to India – got back a few days ago – underscores that the world’s developing economies had best clean up their own acts before pointing fingers elsewhere. Rampant hygiene and sanitation problems – aka rural and urban areas living in squalor – are most certainly not the creation of the white boys’ club that ran global finance for too long.

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