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samudra
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 2:04 pm

From Jan 2005 the quotas for good and services are going to be slowly lifted according to theWTO agreements.How is this going to affect the US/Euro markets?Without the quotas the American/Euro manufacturing sector simply cant match the Chinese in termsof pricing.Given significant impact may be felt in the manufacturing hubs of US can this cause drop in consumer confidence? If so how much?I dont have much knowledge of the possible impact of economies of Europe as a consequence of the WTO agreement. How isEurope going to be affected?Even in services new WTO agreement mandates easier flow of manpower. Will this result in easy flow ofpeople and smoother immigration policies? If the WTO agreements are implemented as it is intended there will be very significant changes in a few years time.But how far are they going to be adhered to is the main issue.What do you feel?
 
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Gmike2000
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 3:23 pm

the cheap chinese etc goods are going to keep inflation low and the yield curve will remain steep with low front end rates
 
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mdubuque
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 5:53 pm

Samudra-With all due respect, your inquiry seems premature.I simply have a very different view of what happened in Geneva last week than the majority of the press, but my view is quite consistent with the analysis in the Financial Times of London, whose views I value highly.The so-called "agreement" that was hammered out on agricultural subsidies seems very vague. The only specificity seems to address Benin's concerns about cotton, but other than that the actual amounts of quotas to be reduced on what particular agricultural items still seems very much to be the subject of future pitched battles. And the clear trajectory is that the strength of local farm constituencies is getting stronger (not weaker) with few exceptions.And this was only the agricultural sector. As I understood it, the four "Singapore issues" dealing with financial "liberalization" were indefinitely postponed and completely unaddressed. This was a huge blow to those seeking to rush those issues on to the agenda.I think the best analysis after what happened last week is that the clear majority of conflicts were merely papered over. About the only thing of consequence that occurred is that Brazil showed some willingness to bolt from its leadership of the G20 over to the North, but the full extent and meaning of this development is far from clear.It's helpful to remember that the WTO only can go forward based on a unanimous agreement of its members. That straitjacket provision is in its enabling charter.In an environment of increasing polarization, that requirement of absolute unanimity looks more and more likely to be a fatal flaw blocking any adoption of the Doha round in the next five years.This is my take.Matthew
Last edited by mdubuque on August 10th, 2004, 10:00 pm, edited 1 time in total.
 
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samudra
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 6:55 pm

Mathew,From what you say it seems a statusquo scenario. What about the quotas on textile?Gmike,Agree on inflation. What about consumer confidence? How do you factor that in?
 
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mdubuque
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 8:54 pm

Hi Samudra-Yes, in my view it's a status quo scenario for the DOHA round with some measurable deterioration, with risk of a catastrophic failure. Things would improve slightly with the return of Robert Rubin (if Kerry is elected). Bush's approach of having Zoellick negotiate a large amount of bilateral trade agreements undermines the whole basis for the WTO in general and the Doha process in particular. Kerry would clearly take the multilateral route here.I wish I knew more about what was decided on textiles. India is slated to reenter the market here after a substantial absence, am I correct? I understood that the Indian textile industry had suffered quite a bit under the preferential status granted to some of the countries on its periphery such as Bangladesh. But I am unsure of this.There are some pretty major changes coming for textiles and South Asia, am I correct?In terms of the long term inflation outlook, it looks like we are heading for some turbulence and very strong cross currents. By no means do they cancel out.In terms of a deflationary bias in world pricing, we have Moore's law which mandates collapsing semiconductor prices which amplify through the economy. Additionally, productivity gains from computer networks are really helping to keep a very tight lid on business costs.And the cost of labor, a huge portion of the cost of doing business, continues to plunge. Global labor is plentiful and plunging in price. Chinese labor at 15 cents an hour brings a huge downward pull to prices.So on the deflationary front, you have an extraordinary amount of items in surplus, from labor, to semiconductors, to plunging crop prices, etc.However, the cost of oil is a real wild card. 75 dollar a barrel oil could easily be reached by March of next year. One dirty bomb, very easy to assemble, exploded at the world's largest oil refinery complex in Dharan would push us to 100 dollars a barrel and more very quickly. The Chinese are continuing to consume oil at a rapidly growing rate as well. And of course escalating costs for oil amplify through many sectors of the economy.But inflationary psychology, measured by real interest rates (the spread between the inflation rate and the nominal yields on government bonds) continues to be relatively stable. And that is critical.Another factor in the long term inflation/deflation outlook is whether the Chinese landing will be a soft one or a hard one. Economic slowdowns are notoriously difficult to engineer (recall Volcker's 1979 tightening after his return from the Belgrade IMF meeting as a prime example) and a hard landing would have troublesome implications indeed for the Treasury market. So I generally keep my predictions to the intermediate term, i.e. 9 months from now. The short term is too volatile to base policy decisions upon and the long-term is too difficult to predict. This intermediate term approach is consistent with what the Fed does in conducting its open market operations.Therefore, 9 months from now, US economic growth should be limping along at 2.8 - 3.1%, the CPI should be around 3.5% and the price of gold should be between 370 and 390. I think March 2005 light crude will be going for $48.50 per barrel. I think the Fed will raise its target for Fed funds by 25 bp in January, but that is all. The Dow and FTSI should both be trending lower, but only by about 4%, nothing catastrophic.That's my snapshot of where we will be 9 months from now. I must admit I don't follow this data as closely as I used to.That's my view.Matthew
 
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samudra
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2005: End of trade barriers, impact on the markets

August 11th, 2004, 9:09 pm

Mathew,You analysis is very thorough and very good. Regarding textile I see India gaining some foothold particularly in high end of the textile segment when more intricate design, handcarving etc is involved.But textile is basically a China story and the floodgates if it opens will be very big blow forthe textile operations in US. This can be real big issue for some small towns in US wheretextile still is important. If oil really skyrocket as you predict the shock will be enormous in India. The inflation willbe staggering. US wouldnot be affected just due to the price increase as the economy is to a great degree insulatedfrom price fluctuations. Europe also has some leeway by tampering with the tax and surcharges on gas.China will probably have a real hardlanding in these scenario. This can totally change your prediction for only a 25 basis point hike. If China goes awry Greenspan have to act fast andit can get very ugly, particularly the housing segment will go for a toss. So if oil crosses 60-65 we are talking about possible worldwide recession.
Last edited by samudra on August 10th, 2004, 10:00 pm, edited 1 time in total.
 
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mdubuque
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2005: End of trade barriers, impact on the markets

August 12th, 2004, 5:11 pm

Thanks Samudra. Yes, I recall now hearing about India positioning itself at the upper end of the textile market. Thanks for the update.Absolutely, 65 dollar oil looks very much to bring about a repeat of the "stagflation" of 1974 and 1979, that horrible condition representing the WORST of both worlds.... stagnant economic growth AND high inflation. It's really an agonizing experience.And of course the nations in the South, as usual, may take it on the chin here. If Kerry is elected and the dollar strengthens (because of the proven track record of Robert Rubin in bringing down fiscal deficits) then not only will the South have to pay a lot more in nominal terms, but they will be paying more for dollars, and oil remains a dollar-denominated asset.A big double whammy which is more likely than it should be in my view.
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