It was just a short twenty two hours on two planes rides, one from Paris to Singapore and the second from Singapore to Melbourne. But somewhere between Wednesday night and Friday morning, it appears that the world decided to go slightly bonkers. Not completely insane, mind you. Just a little punch drunk, the way your editor feels at the moment after switching so many time zones.
But we’re going to push on before we start slurring our speech and see what in the world is worth noticing as we close the week. Gold is back below US$1,000 and oil is at nine week low, for starters. That’s notable. What’s weird is both commodity standard-bearers moved down amidst a flurry of negative headlines about the U.S. dollar.
“HSBC bids farewell to dollar supremacy,” writes Ambrose Evans Pritchard at the UK’s Telegraph. “The sun is setting on the US dollar as the ultra-loose monetary policy of the US Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC,” he begins ominously.
Now there is a big idea behind this currency order. And it is not benign. But the birth of this new currency order comes at the expense of the old geopolitical order. Specifically, it means the comfortable economic relationships of the post World-War Two years are not so comfortable any more. They’re a bit itchy.
Evans says, “Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.”
“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.”
O brave new order…with such uncertainties in it!
So it will be like World War One again, says HSBC. Only this time around the U.S. dollar will be playing the role of the pound sterling. The secular decline of the national economy will accompany the spectacular decline of the currency. But keep one thing in mind…
It could take years for this to happen. It’s been going on for years already, really since Nixon closed the gold window. But the financial markets are not a made-for-TV movie. There is no scriptwriter whose job it is to keep the tension high and the story line moving along. The investment consequences are not going to be instantaneous.
We mention this because we got a stack of e-mails while we were away giving us the boot for being so wrong about the rally. It was a case of non-buyer’s remorse from investors who missed the rally since March after reading our warnings and staying out. What do we have to say for ourselves? The opportunity cost of reading the Markets and Money appears to be getting intolerably high for some readers.
You can have you March rally. These sorts of moves, when they are unsupported by the economic data, are trading events. The performance of stocks in the last six months doesn’t in any way invalidate the larger economic arguments we’ve made about the credit bubble here at the Markets and Money. In other words, the verdict isn’t in on whether our strategy is correct.
It’s going to take a few more years. These issues—the replacement of the U.S. dollar with some other global reserve currency….the transfer of asset ownership from debtors to creditors…and the hysteria you see in a Democracy when it’s revealed that you can’t get something for nothing—these are not just six-month trends.
They are much bigger than that. They are going to claim more corporate and political scalps, too. And preparing for them means you have to have a much longer time frame and a much bigger imagination than your average bobblehead on CNBC.
In fact, now that we think about it, we reckon that if you are really frustrated that the warnings in the Markets and Money have prevented you from making money in the last six months, you probably shouldn’t continue to read the Markets and Money. You will have missed the point of what we try to do for investors (which is to ignore the noise and focus on the historical back story).
But it’s a free world (in most places, for the most part). So if you want to keep reading just for the pleasure of getting really upset with us, that’s your call.
One final note before we go to bed…not all land is valuable. Earlier in the week we wrote about how renters in Europe—especially Britain—profited so much from “three-life” leases because of the huge inflation in European land prices that took place during the term of the leases.
As we flew over the vast empty width of the Australian continent last night, we realised that not all land is created equal. This is obvious, of course. But more land does not automatically make a country wealthier. If it’s not fertile and you can’t graze animals on it, the land will not be economically productive.
Or, if it is productive, it will be for digging and drilling for metals, ores, minerals, and oil. Extractive industries generate tradable goods. But they don’t directly feed people.
Whether land itself is the prime mover in call other capital values…that is a question we’ll take up next week. And the answer may even lead us to some specific observations about what stocks are worth buying now and what stocks aren’t. Until then…
It’s almost Armageddon if the Japanese and Chinese don’t buy our debt,” Robertson said in an interview. “I don’t know where we could get the money. I think we’ve let ourselves get in a terrible situation and I think we ought to try and get out of it.”
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