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The Real Green Shoots Saga

Ashish Advani (July 21, 2009)

Tuesday, July 21, 2009

What Washington, Wall Street or the Media Won’t Tell You…

Also In Today’s Letter…

By Ashish Advani To me, this whole green shoots story seems more like a lover’s spat than anything else.

One week, the market wants to believe that the green shoots story is for real. We see stocks, commodities and yes key currencies rally. Then the next week, the market goes through a bout of despair again and we’re back to second guessing this whole green shoots story.

And it looks like this saga will continue for many moons to come.

But the question is…what’s really going on here? Do green shoots really exist? Are they just something Wall Street and Washington made up to make us all buy stocks? Or is it more complicated than that?

“It’s Naïve to Think Green Shoots
Are Growing Everywhere.”

In order to really understand all the nuances of the green shoots story, you have to dissect the story by region. The globe is a large place and believing that every single country has a similar boom or bust pattern is just being naive.

Now of course, all regions are interconnected to some degree. But still, each region has its own rhythm. In a shorter period of history separate regions around the world can be quite divergent from the global macro story.

Indeed, in the shorter run timeframe, we can see growth in China and India with negative growth in the United States. That’s exactly what is happening now.
My friend and colleague Sean Hyman, who is one of my co-anchors here in FX University Daily has indicated this with a beautiful graph which indicates that China will lead the world out of its current slump…

China Is On the Frontlines Pulling Us to Recovery…

We in the U.S. have believed for a very long time that the world revolves around us. While the U.S. is very important, it is not the only economic driver for the world. And the Greens Shoots story is a perfect example of that.

In order to understand the Green Shoots story, it is important to understand the story from each of the regional aspects. For convenience sake, I’m splitting the globe into the following regions…

  1. North America
  2. Europe and Japan
  3. Asia (minus Japan, so China, India, Singapore, Thailand, etc.)
  4. Commodity based economies (Australia, Brazil, South Africa, etc)

Now let’s inspect the green shoots story by region to understand how I would see the world grow in the next few years.

This is all-important to know dear readers. Once you know where green shoots are actually growing, you can invest accordingly. You can buy and hold these stronger currencies from the green shoots countries. You can also short the nations that are only pretending to grow green shoots.

And being a foodie at heart, I want to term each region with a popular food type just to keep things interesting. Let’s start with the land of burgers and pizza, the U.S.

Don’t Buy the Hypey Green Shoots Story Here in the U.S.

If we consider the green shoots story from a North American perspective, I would tend to agree with the critics who say the story is premature. The hype we observed in the March-June period this year has been overblown.

While I do believe that we have seen a significant part of the worsening of the economy since last September, I cannot bring myself to believe that the worst is over.

What They Want You to Believe…

It is ridiculous to believe that five years of excesses can be unwound in six months. I tend to believe that the excesses in our world date back longer than five years. The bull run we have seen recently started about 20 years ago and with routine mild pullbacks, we have see the longest period of growth in U.S. history.

Despite all good intentions and desire for this downturn to be over, I just cannot bring myself to believe that this worst is over. I don’t believe we’ll simply return to solid growth periods. As the best-case scenario, I believe we will see two more quarters of negative growth and then a couple of years of 1-2% GDP growth.

And as I said, this is my best-case scenario here in the land of burgers and pizza.

North and South of the Border: Green Shoots Wilting

Now moving deeper into North America, we have Canada and Mexico.

The Canadians are tied at the hip to the U.S. economy. The U.S. buys 75% of Canada’s exports. A few years ago this number used to be well above 85%. So yes, there is a bit of the diversification story here. Canada has tried hard to slowly but surely move away from its complete dependence on the U.S. economy.

While this will take many more years, it will achieve better results as momentum picks up. Canada is also blessed with several natural resources like copper, zinc, gold and oil. The Tar Sands will become viable on a consistent basis if oil prices stay above the $65 mark on a long-term basis. And with the current trajectory, we may be there already if not to get there soon.

So in the next few years, Canada will de-couple itself even more than now.

Mexico has a somewhat similar story to Canada but has a lower level of comfort to it. Mexico’s two major exports are tourism and oil. While oil will continue to support Mexico, tourism will suffer significantly as the U.S. consumer finds it hard to find disposable income to spend on vacations.

So the Burrito / Enchilada flavored green shoots will be served in limited quantity going forward.

In summary, the North American green shoots story is slow at best. At this point the only thing that can change my mind is our GDP. In fact, I would happily stand corrected if the U.S. economy grows at 3% GDP growth by 2012 at the earliest. And it will drag Canada and Mexico along with it.

Tomorrow, we will visit Europe and Japan to see if the Green Shoots story is alive there. Until then…

Yours in FX Profits,
Ashish Advani

P.S. Remember, once you know where green shoots are growing, you can buy and hold specific “green shoot currencies” and profit over the long haul. In fact, I’ve already discussed one country that continues to boast a green shoots in a recent issue of Currency Capitalist. In next month’s issue, I have a way to play this impressive growth story and grab a 9% guaranteed return. Members, please look for all the details in your August issue. Not a member yet? Click here for details on how to become one and you’ll receive our next 12 issues for pennies a day.

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