Rising Demand for British Butlers by Emerging Market Super Rich

Super Chinese and Russian millionaires seem to have a penchant for English household workers.

Earlier I posted news which exhibited a surge in demand for British nannies, this time we are told that demand for English butlers have been the chic.

From the Bloomberg

English butlers, synonymous with Reginald Jeeves in the novels of P.G. Wodehouse, are answering more calls from super-rich Chinese and Russian clients as wealth shifts between east and west.

The Guild of Professional English Butlers has trained 20 percent more butlers this year than last, placing them with clients as soon as they are ready, according to Robert Watson, head of the firm in southern England, last week. The number of domestic staff registered with Greycoat Placements has trebled over the past three years, Managing Director Debbie Salter said.

“Demand is outstripping supply,” Watson said by telephone. “We deal with people who often are cash rich and time poor. The credit crunch did affect things for a time, but before you get rid of the butler, get rid of the Ferrari.”

As Europe struggles with a debt crisis and the U.S. tries to revive its economy, burgeoning growth in emerging markets is boosting spending on luxuries like never before, and creating opportunities for more people to look after them.

The ranks of millionaires in 10 major Asian economies will more than double to 2.8 million by 2015, according to a Julius Baer Group and CLSA Asia Pacific Markets report on Aug. 31. China’s economy grew 9.1 percent in the third quarter from a year earlier, compared with U.S. growth of 1.5 percent.

We need to qualify who the nouveau super rich Chinese and Russians are, because many of them have attained their status via political privilege.

Yet, shifting preference for Western household workers by EM super millionaires could also signify symptoms of the ongoing wealth convergence from globalization.

And such dynamic could be magnified by the continuing trend to adapt inflationist policies by the West, as Emerging Markets open their economies to the world and or to domestic entrepreneurship. Interesting signs of evolving times.

Here Comes the British Nannies

Step aside Filipina domestic helpers, here comes the British Nannies.

This looks like a reversal of roles, as emerging market elites have commenced on hiring Western household help.

From the Business Insider,

Lucky London nannies are earning insanely high salaries thanks to an influx of wealthy Russians, Chinese and Indians, who want their children to learn English from a native, according to The Times of London.

The starting pay at the elite agency Imperial Nannies is $75,000, typically including room and board in an upscale neighborhood and extraordinary perks like a car, clothes and luxury travel. One Russian family reportedly offered $200,000 to lock down a top nanny.

Of course the work isn't easy. Founder Sarajane Ambrose tells The Times:

“You’re walking into a completely different culture and environment of extraordinary wealth and different family values. Russian families require you to be on call 24 hours a day, 6 days a week. The children are always accompanied by bodyguards. There are cameras everywhere. They have a jet-setting lifestyle, which means you spend a lot of time packing and unpacking. They’re very ambitious for their children and because they dress them in designer clothes, they’re not allowed to get dirty. Russian children don’t wear Gap.”

The above dynamic has been symptomatic of what has been happening in the world today.

Yet this trend could intensify or deepen, if the West-East wealth transfer or wealth convergence persists, which will be magnified by sustained policies of inflationism by the sitting authorities of western nations.

Confirmation of the Phisix Breakout!

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. — F. Scott Fitzgerald

The landmark breakout by the Philippine composite benchmark, the Phisix, has been confirmed!

It’s certainly not just that the local benchmark has treaded on fresh nominal record highs, importantly, we should expect momentum to continue if not accelerate.

Attempting to time the markets under these conditions will likely leave market participants with opportunity losses and remorse (regret theory), as broad market actions will likely be defined by sharp upside swings.

Again this phenomenon has not been isolated to the Phisix but can be seen as a regional dynamic.

While major ASEAN equity markets crawled away from the losses at the start of the year, the high octane rebound appears have been a recent phenomenon which only commenced last June.

Ironically, these has been happening on a post QE 2.0 environment (but with QE 3.0 officially on the table[1]), and despite various global market interventions, that initially had jolted global financial markets.

The milestone performance by the domestic bellwether [Phisix: PCOMP, red-orange line] seems coy compared to the breathtaking bullish renditions by Indonesia [JCI: orange line] and Thailand [SET: green line].[chart courtesy of Bloomberg]

Malaysia [KLCI: red line], whom earlier took a temporary lead has, over the interim, deviated from the group and appears to be weakening. This divergence could be a temporary phenomenon.

Nonetheless, all four ASEAN bellwethers have posted advances on a year-to-date basis. And notably, the gains by ASEAN ex-Malaysia appear to be progressing swiftly.

Breakout Confirms the Long Term Direction

The most important message from such this monumental breakout is the apparent continuing confirmation of my long held view of the evolving boom-bust cycle of the Phisix[2].

Patterns don’t play out because of fate or destiny, as some mechanical chartists seem to suggest, instead patterns play out because of real underlying forces that drive them. People’s choices and NOT patterns ultimately determine market actions or cycles.

We should never confuse patterns or historical experience with deterministic action in the way natural science behaves.

As the great Ludwig von Mises reminded us[3], (bold emphasis mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The Philippines experienced its first modern bubble cycle which progressed during 1985-2003, an 18 year cycle. This cycle surfaced after the Philippines had been liberated from a tyrannical rule which had suppressed the local market and the economy.

The first bubble cycle saw the Phisix advance from around 150 to around 3,100 for a whopping gain of 19x. The advance had not been linear, though. Two bear markets interspersed the advance phase. These bear markets (orange and green ellipses) were both triggered by failed coup d'états.

Yet the advances coincided with then President Cory Aquino’s administration’s US $12 billion worth of bailouts of several politically connected banks that caused the old central bank to fold from the strain[4].

A topping process developed in 1994-1997, as Japan’s busted bubble redirected a gush of Japanese capital into ASEAN economies[5]. The regional or ASEAN inflation boom eventually unraveled and became known as the Asian Crisis[6].

The ensuing 6 year bear market accounted for as the market clearing process for the region and for the Philippines, part of which had been aggravated by a global recession[7] triggered by the US dot.com bubble bust[8].

Today, the Phisix has been playing out a seminal cycle.

The 2007-2008 bear market in the Phisix had been due to exogenous factors—a contagion from the US mortgage crisis. Yet the latest bear market resembles the earlier or first coup bear market of 1987 (orange ellipse).

This week’s breakout only confirms my long time claim that the recent bear market served as normative countercyclical phase representative of any major trends.

And that’s why I’ve been repeatedly saying that the Phisix will, in the fullness of time, reach 10,000.

It’s a long term trend that seems underway even for our neighbors.

With the conspicuous breakout for the Indonesia, Malaysia and the Philippines (as shown by the charts from chartrus.com), only Thailand, the hub of the Asian Crisis, has yet to reach all time highs.

My crystal ball does not have the surreal or metaphysical sophistication that would allow me to predict the exactitudes, or simply stated, “I can’t say when”. I am no Madame Auring.

All I know is that for as long as the primary forces which drives the Phisix or ASEAN markets—particularly the internal or domestic monetary policies and transmission mechanism from external monetary policies—both of which signify as bubble policies, globalization (which implies further development of the capital markets of ASEAN or of most of Asia) and the global wealth transfer (West-East) or convergence dynamics—remains intact, this advance phase should continue.

In my view, it would take an endogenous or a regional bust similar to 1997, or a reversal of one of these primary factors—through the materialization any of these ‘fat tail’ events: outbreak of global protectionism or a US dollar collapse that risks global hyperinflation or a war that involves the region or a deflationary banking collapse where central banks would not intervene or the adaption of a gold standard—that risks terminating this inflationary boom cycle.

In short, patterns are hardly ever conclusive or that they don’t play out because they have or need to. Since market actions are not historically determined, the realization of patterns would be conditional to the material similarities in the feedback mechanisms or stimulus response dynamics which operated then and which operates today.

If there is a single major nexus between then and today that could influence the fulfillment of said patterns, it is the path dependent nature of governments to inflate the system designed to safeguard the banking system and to preserve the cartelized tripartite patron-client relationship of the welfare state, banking political class and central bankers. The consequences of their actions have perennially led to business (bubble) cycles.

As to whether there will be another countercyclical trend [another provisional bear market] or that the Phisix might advance unobstructed is beyond my ken. Albeit if there will be a clear and present danger that risks another major crisis, I think this could emanate from China[9], instead of the the Eurozone or the US in contrast to mainstream’s expectation.

So far while there have been signs of strains[10] in China, they have not reached a point where I would need to increase demand for cash balances for myself and for my clients.

As far as the current signals from which price trends seem to have been telling us, the upside leg of this advance phase may not only continue, but would likely strengthen.

Breakout Confirmed by the Peso and Market Internals

The Philippine Peso has conjointly broken out of their resistance levels along with Phisix. I told you so.

The tandem’s working relationship has been pretty much solid and dependable. The correlation may not be perfect since the Peso’s action has been distorted by the sporadic interventions by the Bangko Sentral ng Pilipinas (BSP) nonetheless the causation has been strong. Both have been reacting to the relative demand for the Peso assets. The Peso has been driven more by the state of capital flux[11].

Also the Peso can be seen as pursuing less inflationary policies than the US dollar, but a lot more inflationary than the Swiss franc[12].

The simultaneous breakouts can be viewed positively.

Yet the pendulum of the market internals has swung decidedly in favor of the bulls.

This historic breakout has been backed by a hefty surge in volume (weekly volume; left window) which translates to more participation by the public and the pronounced aggressiveness by the buyers.

Foreign inflows, for the week, remained substantial but constituted only about 35% of total trades. This implies positive sentiment for both local and foreign participants.

Based on the average daily traded issues (computed on a weekly basis), the public’s trading interest reached nearly 80% of the 244 issues listed. This means that third tier formerly illiquid and dormant securities have been getting some attention and liquidity. Such spillover dynamics signals broad market bullishness.

It is rare to ever see such strongly linked or convergence of signals as this.

Except for the holding sector, every sector in the Philippine Stock Exchange posted gains.

This time the financial and the property sector tailed the overheated Mining sector both of which has contributed substantially to the advances of the Phisix.

Yet given the sharp pullback by the mining sector over the past two sessions (about 6% from the 2-day high), despite the weekly reported gains, the overstretched mining sector could enter a temporary corrective-consolidation phase.

The mining sector has been up by a remarkable 15 of the last 17 weeks. This week’s advances marked the 5^th consecutive week which has elevated the sizzling hot year-to-date returns to an eye-popping 61.45% as of Friday’s close.

While the strong breakout and the bullish tailwind could mean that the Phisix could rise further, we can’t discount profit taking sessions.

And part of this phenomenon could highlight a rotation away from the mining sector and into the other laggards, perhaps to the finance[13] and the property[14] sector as the next major beneficiaries of the percolating inflation driven boom as previously discussed.

A Journey of a Thousand Miles by Single Steps

Greece received second round bailout package 159 billion euros ($229 billion) which has been larger “shock and awe” than expected by the public.

As the Danske Bank reports[15], (bold emphasis mine)

In particular, the elements of the second rescue package for Greece: EUR109bn in official funds, a EUR12.6bn debt buy-back programme, a lowering of interest rates to 3.5%, a lengthening of the maturity on future loans to Greece to a minimum of 15 years and up to 30 years with a 10 year grace period, as well as a lengthening of the maturity on existing loans.

Burden sharing with the IMF will proceed in line with standard practice (1/3 from the IMF).

The increased flexibility of the EFSF could result in more active intervention in the secondary market. The EFSF now takes on this role, which was previously played by the ECB, but will still be supported by ECB analysis.

Such announcement appears to have lifted the global equity market’s sentiment. That’s because we have another QE in place, but this time based on the Eurozone’s rescue, which has been hardly about Greece, but of the Euro (and US) banking system.

And if global equity markets continue to recover from the recent PIIGS crisis shakeout, where the direction of global equity markets may converge, then this should further intensify the bullish proclivities at the Philippine Stock Exchange or ASEAN bourses as foreign capital seek for higher returns or as safehaven on assets of currencies that have been less tainted by inflationists policies.

Under current circumstances it would be best to use pullbacks as buying windows and to refrain from “timing the markets”.

The gist of any relative outperformance portfolio gains or Alpha[16]--return in excess of the compensation for the risk borne—frequently comes from the magnitude of returns[17] and not from frequency of marginal returns which contemporary sell side analysts design their literatures for their clients or how we are traditionally taught even by academia. (I had to challenge my son’s professor on this)

Yet before we think of the Phisix at 10,000, we will need to see the local bellwether transcend the psychological threshold at 5,000, perhaps by the end of the year.

This journey of a thousand steps, to paraphrase Confucius, will be attained through a series of single steps.

Again, profit from political folly.

---

[1] See Ben Bernanke on QE 3.0: Not Now, But An Open Option, July 15, 2011

[2] See The Phisix And The Boom Bust Cycle, January 10, 2011

[3] Mises, Ludwig von Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Chapter 2, Section 1 Human Action, Mises.org

[4] See Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”, June 20, 2011

[5] See Capital Flows, Financial Liberalization and Bubble Cycles, July 22, 2011

[6] Wikipedia.org 1997 Asian financial crisis

[7] Wikipedia.org Early 2000s recession

[8] Wikipedia.org Dot-com bubble

[9]See Mark Twain and China’s Yuan, June 25, 2011

[10] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion June 28, 2011

[11] See I Told You So Moment: The Phisix At Milestone Highs, July 17, 2011

[12] See Is the Swiss Franc Better than Gold?, July 21, 2011

[13] See A Bullish Financial Sector Equals A Bullish Phisix? May 22, 2011

[14] See Expect a Rebound from the Lagging Philippine Property Sector, July 17, 2011

[15] Danske Bank EU summit delivers bold measures, July 22, 2011

[16] Wikipedia Alpha (investment)

[17] See Investing Guru Joel Greenblatt: Focus on the Long Term, July 9, 2011

Paradigm Shift: Brazil, Indians and Chinese Invest in Overseas Properties

Past performance do not guarantee future results.

Many of today’s international property investors have not hailed from the West, but rather from the Nouveau riche of the BRICs (excluding Russia), whom have reportedly been on a buying spree.

First, the Brazilians.

From the Bloomberg, (bold highlights mine)

Surging real estate prices in Brazil and the currency’s 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That’s helping bolster Miami’s condo market, with total sales increasing 79 percent in the first five months of 2011 from a year earlier, according to data from the Florida Association of Realtors released today.

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

Next, the Indians

From loansafe.org

Wealthy Indians are keeping the family bonhomie alive in the heart of London, buying not one but a cluster of houses or apartments for themselves, their children and small teams of personal staff. Tony areas like Kensington, Mayfair, Knightsbridge and Belgravia are some of the popular destinations for such clusters.The homes typically are a network of residential properties on a street or an apartment block. The central idea behind such purchases is that it will give the children a sense of independence, staying just a few houses away from their parents, with support staff being just a buzz away.

High networth individuals from India and the Middle East are the main cluster buyers in London. In fact, there has been a marked increase in the number of Asian buyers. “Asians are our biggest single group of purchasers now, accounting for 44 percent of sales in 2010. Of this, 17 percent were Indians. In 2008, only 7 percent of the purchases were made by Asians,” Shirley Humphrey, sales and marketing director of Harrods Estates, a property broking firm, said. According to her, a weak British pound and low interest rates have contributed to the appeal of cluster buying in prime residential areas. (bold emphasis mine)

Finally the Chinese

From China Daily (bold emphasis added)

An increasing number of China's rich are snapping up properties overseas in the expectation that domestic inflation will continue to rise after the consumer price index reached a 34-month high in May.

According to Colliers International, a real estate service provider, the proportion of Chinese buyers in Vancouver's property market is on the rise. At the end of the first quarter this year, it increased to 29 percent of all homebuyers.

In the past six months, Chinese spent 1.3 billion yuan ($200 million) through Colliers' international property department, with Canada, the UK and Australia topping the buying list.

"We are expecting a clear increase in the extent of mainland buyers' purchases of overseas properties this year because of the government's rigorous restraint on the number of homes a family can buy in key cities," said Alan Liu, managing director of Colliers International (North Asia).

Due to the latest financial push from China, the average price of a home in Greater Vancouver rose 12 percent in 2010 and is expected to rise another 3 percent this year, according to the Canada Mortgage and Housing Corporation.

Demand from mainland immigrants now accounts for 29 percent of all new homes in Vancouver.

The situation in London is similar. Last year, overseas nationals purchased 28 percent of all resale properties across all prime London sites and 54 percent by value in the prime central London area in the more than 5 million pound ($8 million) price bracket, according to a recent report by Savillsresearch.

"If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15 per cent," said Yolande Barnes, head of Savills residential research.

"The issue at present is that Chinese buyers aren't taking, or can't take, their money out of China."

The biggest increase in global billionaires since 2007 has occurred in China and the Commonwealth of Independent States (CIS). While CIS buying activity has been strong, accounting for 15 percent of prime central London purchases by value, Chinese billionaires have yet to have a real impact, accounting for just 3 percent of prime central London resale purchases by value.

More thoughts.

International and domestic monetary policies have been a significant factor in driving property investments overseas.

There is also globalization.

Finally, the irony is that the erstwhile ‘poor’ appears to be saving the traditional ‘rich’ as in the case of London and South Florida.

How times have been changing.

Has Swelling Numbers of Asian Millionaires Been Symptomatic of Wealth Transfer?

We’ve been talking about wealth transfer, i.e. from the West to the East. And perhaps, this could be a sign. A report says, Asian's have nearly caught up with the west in the race of High Net Worth Individuals (HNWI).

According to Bloomberg,

``The number of individuals with at least $1 million of investable assets in Asia-Pacific rose 26 percent to 3 million in 2009, matching Europe and almost overhauling North America’s 3.1 million, according to the 14th annual World Wealth Report published yesterday.

``Asia “continues to lead the global economic recovery and this has benefited many of the markets in the region in terms of both growth and wealth creation,” Ong Yeng Fang, market managing director for Indonesia, Philippines and Thailand at Merrill Lynch Wealth Management, said at a conference in Singapore today. Given Europe’s debt crisis, “there is a very high possibility that their numbers will be surpassed.”


To add, the Capgemini-Merrill report says: (bold highlights mine, graphs from Capgemini)

-The Asia-Pacific HNWI population rose 25.8% overall to 3.0 million, catching up with Europe for the first time, after falling 14.2% in 2008. Seven countries within the region actually saw their HNWI populations recover beyond 2007 levels.



-Asia-Pacific HNWI wealth surged 30.9% to US$9.7 trillion, more than erasing 2008 losses and surpassing the US$9.5 trillion in wealth held by Europe’s HNWIs.

-After falling 19.0% in 2008, the HNWI population in North America rebounded, gaining 16.6% in 2009. HNWI wealth there rose 17.8% to US$10.7 trillion. North America remains the single largest home to HNWIs, with its 3.1 million HNWIs accounting for 31% of the global HNWI population

For us, the reason Asia has been fast catching up with the west is that she has been engaged in less relative inflationism, which has been embraced by the west as the orthodoxy. But of course, everything is fluid or subject to change.

Gary North On Why Asia Will Surpass The West

Here is Professor Gary North on Why Asia will Overtake the West,

``How is it that Asia has had a huge trade surplus with the United States? Because its people work long hours. They are finally getting access to capital. This capital increases their productivity. The tools they need to compete are made available through thrift. Then they put capital to use in a long work week. They have little time for leisure. They are at work many hours per day.

``In contrast, Americans are losing capital through consumer debt and withdrawal from the labor force. I don't mean unemployed people. I mean underemployed people. The person who watches TV for 4 hours a day is consuming his most precious capital: time.

``When we see a society committed to work, we see a society that has the basis for economic growth. If people work hard to get ahead, they will accumulate capital. Their work will become more efficient. If they work merely to buy spare time for play, then they will not experience economic growth.

``Asia is growing economically, because of the people's future-orientation. The United States is barely growing, because of its present-orientation. We see this in the waste of time associated with entertainment. This is a culture-wide phenomenon. It has been accelerating in the West for at least 85 years. The rise of radio and the movies marked the transition. World War II delayed the advent of the entertainment culture. The 1950s produced the first teenage subculture. It had its own movies, music, and entertainment. Why? Disposable income from parents and part-time jobs. The money went into our pockets. That was my generation. We spent as children spend, but we spent more money than children ever had spent in history. We got used to entertainment. The counter-culture, 1965–70, was even more committed to entertainment. It even turned cultural revolution into entertainment.

``This happened all over the West. It was not a uniquely American phenomenon. The student revolt in France in 1968 was worse than anywhere else.

``We now live in a nation that has suffered capital consumption. Foreigners are providing capital for us. Asians buy something like 40% of Treasury debt sold to the public. This will not go on indefinitely.

``When we learned to waste time and money in our youth, we developed bad habits. These bad habits are not easily broken. Asians never developed these bad habits. The youth of Asia headed for the cities to get jobs, not entertainment."

While it is true that attitude, behavior and time preference are key factors necessary to an Asian outperformance, I think these are insufficient.

Accumulation of capital can only come from a political and economic environment that permits it to do so. As Ludwig von Mises wrote, ``The masses, in their capacity as consumers, ultimately determine everybody's revenues and wealth. They entrust control of the capital goods to those who know how to employ them for their own, i.e., the masses', best satisfaction."

In other words, Asia will be able to surpass West only if Asians pursue and maintain a more capitalist society or an environment of greater economic freedom which allows her people save and accumulate capital, from competition and production of more goods and services to serve the masses, whom as Mr. von Mises said, determines the wealth of the society.

Rediscovering Gold’s Monetary Appeal

``Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency.”-James Grant

For some rising gold prices has been gladly cheered upon. For the gold is “barbaric metal” camp, rising gold prices account for as an intense denial to the vulnerability of their interventionist doctrines.

For us, rising gold prices epitomizes a build up of monetary systemic stresses arising from an overdose of politicization of the US dollar- the world’s de facto substitute to the gold standard. This warrants more concern than either acclamation or denial.

The world has been operating on a monetary system that has been anchored on paper money since 1971 or 38 years ago, yet for the thousands of years of human civilization, paper money has unsuccessfully thrived as the sustained standard of global medium of exchange. This has been due to the cyclical or inherent self serving nature of the political leadership to profit from inflation or by taxing society in order to uphold, expand or preserve their political powers.

Even commodity money had not been spared from the inflation taxation. This has been evident even during the Roman Empire, as Joseph Peden wrote ``In Diocletian's time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii.”

And the same dynamics holds true today.

Essentially, the politicized nature of money eventually leads to its demise.

Inflation Is Dead. Long Live Inflation!

Gold have been rising for many valid cited reasons such as an inflation hedge (see Figure 4), supply demand imbalances, the shifting nature of gold ownership (as investment instead of jewelry), or central bank buying or reduced sales [see Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy]

Figure 4: US Global Funds: India-IMF Deal: Tipping Point for Gold

Gold’s record price surge appears to have resurrected its innate monetary appeal.

Over the years, gold had earlier been reckoned as headed for oblivion, as the political authorities along with their banking agents, whom are their chief associates, as well as their academic disciples imbibed on the fantasy that “inflation as an elixir” have allowed them to finally “domesticate” and “tame” inflation with modern and sophisticated mathematical tools.

In essence, the supposed conquest of inflation became a mainstream credo which operated under the principle of the philosopher’s stone- or the alchemy of turning base metals into gold! Prosperity can, thus, simply be achieved by Free Lunch policies! And supporting such beliefs were literatures that sprouted to claim the death of inflation!

Unfortunately today, reality has begun to sink in. To add, such bubble psychology has also commenced to unravel over the imbalances built beneath the surface by overweening overconfidence. Hence, the ramifications from the previous sins have started to emerge and become manifest in the marketplace. All these are being reflected in terms of changes in price levels.

The Role Of Scarcity In The US Dollar’s Diminishing Luster

So why gold’s role as money being revived?

Because the very important fundamental attribute of money is in the process of being perverted.

The basic and most important attribute of money according to Mr. Ludwig von Mises is scarcity, ``Media of exchange are economic goods. They are scarce; there is a demand for them. There are on the market people who desire to acquire them and are ready to exchange goods and services against them. Media of exchange have value in exchange. People make sacrifices for their acquisition; they pay "prices" for them. The peculiarity of these prices lies merely in the fact that they cannot be expressed in terms of money. In reference to the vendible goods and services we speak of prices or of money prices. In reference to money we speak of its purchasing power with regard to various vendible goods.”

When money fails to dispense of its role, then the public begins to question its existence and look into alternatives. The ruckus to replace the US dollar by key emerging market central banks reflect on these symptoms.

So it is of no doubt to us that commodities (particularly precious metals) will likely benefit from the uncertainty interregnum as the world continues to deal with the burgeoning tensions from the US dollar system.

Figure 5: stockcharts.com: Commodities versus the US dollar Index

Said differently, for as long as society hasn’t resolved on the dilemma of, or found a substitute for, the prevailing money (US dollar) system, these commodities will exhibit their innate roles as potential candidates as money, for the basic reasons of scarcity and their historical role as money.

As Professor Gary North wrote, ``Individuals in the past voluntarily adopted gold and silver coins as the preferred commodities to facilitate economic exchange. They did not accept these two metals as the preferred monetary units because of their commitment to economic theory. They chose those metals because there are advantages offered by these metals that competing commodities do not possess to the same degree. The main advantage is continuity of value (price) over time. Gold and silver became currencies throughout the world because they possess certain physical characteristics that facilitate their adoption as money. The most important aspect of both gold and silver is that they must be mined. It is expensive to dig these metals out of the ground. Silver is primarily a byproduct of the mining of other metals: lead, copper, and zinc. Mining firms must bear the costs of extracting these metals from the earth. This limits the production of these metals. They are comparatively scarce minerals, and it is expensive to dig them out of the ground.” (bold highlights mine)

Ergo, the pricing levels will exhibit on the relationship of precious metals’ role as money.

Does India’s Recent Gold Buy Herald A Watershed Moment?

In addition, India’s recent surprise acquisition of 50% of IMF’s inventory of gold for sale establishes two important points:

One, emerging markets appear to be intrepidly exhibiting a snowballing desire to accumulate less US dollars reserves and also less US denominated securities and channel most of their spare reserves into hard assets. It’s basically a vote against the US dollar.

This reinforces our “commodity-as-insurance” view and the potential role of commodity as part of the future money. According to Professor Michael S. Rozeff, ``There are only two kinds of solutions: inflationary and non-inflationary. A British pound as good as gold is long gone. A U.S. dollar as good as gold is long gone, but the dollar has hung on for 37 years now. A yuan as good as gold does not exist. A basket of currencies as good as gold does not exist. The inflatable dollar and inflatable currencies are ruling the roost at present. India’s action and some of China’s actions signal that they are inching – really groping – their way back to hard assets and a non-inflationary solution.”

Second, India’s gold purchases could be indicative of a monumental redistribution process or of a convergence of wealth between developed economies and emerging economies.

This quote from the Financial Times echoes such sentiment, ``Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.”

``He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.” (bold emphasis mine)

Hence, India’s purchase of IMF’s gold could be interpreted as a watershed moment or a tipping point as this could mark the decline or the twilight zone of the US dollar as the international currency reserve.

Also, we’ve been asked if Gold at present levels is a buy today. While we have been serendipitous enough to have accurately called for a gold breakout last August [see Gold As Our Seasonal Barometer], market timing isn’t our forte.

Seen from seasonality patterns, gold usually peaks on February and will be on a downhill until August.

But it isn’t clear if such pattern will hold.

This would likely depend on how global central banks and global investors will react to recent fresh unprecedented developments.

As we have said, markets have been acting significantly less to exhibit the conventional mode. Instead, markets have demonstrated its unorthodoxy due to its Frankenstein state-being highly dependent on government steroids.

Figure 6: US Global Funds: India-IMF Deal: Tipping Point for Gold

And as figure 6 suggests, any bandwagon effect from India’s purchases could inflame a stampede for Gold!

With emerging markets holding the bulk of global currency reserves, ``IMF data shows emerging and developing economies hold USD 4.2 trillion of the USD 6.8 trillion in total reserves. China has over USD 2 trillion, followed by Russia with more than USD 400 billion and Brazil and India with above USD 200 billion each” (moneycontrol.com), and aside from central banks of emerging markets being vastly underrepresented in gold reserves relative to the US or Europe, a mad dash for gold can’t be discounted.

And we are not speaking of central bank alone, Adrian Ash of BullionVault.com recently estimated the gold market, ``Estimated at 165,000 tonnes, the total stock of gold-above-ground is now worth some $5.8 trillion. Research by BullionVault puts that sum at no more than 6% of global investable wealth, down from well over 10% throughout the 1980s and peaking nearing 30% at the points of extreme investor stress in the late 1970s and early '30s.”

Conclusion and Recommendation

To close, gold’s recent record run appears to have dramatically signaled a seismic change in the perspective of the marketplace and of governments in terms of gold’s role as money.

As strains or pressures on the US dollar standard remains unsettled, such uncertainty is likely to underpin the dynamics behind gold’s rise.

Rising gold prices represents global monetary stress than simple localized “inflation”. Moreover, because monetary stress is a structural issue, then it won’t just be central banks underpinning gold’s ascent but likewise the investing public, which accounts for a bigger share of ammunition, in the context of wealth preservation.

Moreover, the accumulation of gold by emerging markets signal wealth convergence aside from the watershed decline of the US dollar as the world’s reserve currency.

Since gold’s dynamics has been evolving from jewelry to investment and or central bank reserve demand, it would be futile to short term timing markets. The best is to buy on dips and await gold’s full transition of its bullmarket trend into the mainstream.

On the interim, the politicization of the monetary and fiscal policies will likely exacerbate the US dollar predicament. And as political faux pas compounds, gold’s functional role of money will likely expand.

Nevertheless, the end of the gold bullmarket will entail the resolution of the US dollar’s foreign currency reserve predicament, which is unlikely to happen soon. That’s because domestic politics and geopolitical issues serve as principal hurdles.

Signs Of Wealth Transfer In US-China Car Sales

This should be a milestone. Car sales in China has surpassed the US.

According to the Economist,

(all bold highlights mine)

``CHINA'S car market has overtaken America’s in sales volume for the first time, several years earlier than analysts had predicted before the financial crisis. Plummeting demand in the West is to blame. Earlier this year, as the American government was buying 61% of General Motors and 8% of Chrysler to prevent them from collapsing, the two manufacturers’ sales in China were rocketing. GM’s sales in China in August more than doubled on a year earlier. For 2009 as a whole the company predicted a 40% rise. Sales of all car brands in China in August were up by about 90%, helped by a cut in the purchase tax on smaller, more fuel-efficient cars. There is also huge pent-up demand as a new middle class takes to the road."

Additional observations:

-the economic orientation of the West had been built mainly on policy induced culture of dissaving and debt financed consumption spending, whereas China has revolved around savings, thrift and production. The difference is that the West consumed its capital whereas the East accumulated capital. The eventual outcome: a dynamic of wealth transfer

-GM's iconic Hummer is still in the process of being sold to a lowly heavy machinery outfit called Tengzhong, this adds salt to injury.

-the apparent dynamics of wealth transfer is now being manifested in the car sales above where China has supplanted the US.

-yet this is a clear sign of decoupling, from which globalization hasn't totally eliminated.