Gold: An Unreliable Inflation Hedge?

``Gold has two interesting properties. It is cherished and it is indestructible. It is never cast away and it never diminishes, except by outright loss. It can be melted down, but it never changes its chemistry or weight in the process. Its price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century." James Grant quotes Roy Jastram

Since Gold has recently racked up a new historical high in nominal terms, I’d like to dwell on some objections made by several experts.

Gold’s fantastic 4.6% surge over the week to close at a record $1,049.4 seems quite distant yet from its real (inflation adjusted) highs of $2,264 using BLS.gov data, when considering its 1980 high at around $850. In other words, the high of $2,264 reflects on the 1980 purchasing power of the US dollar.

To add, if we consider today’s price levels compared to that when the former US President Nixon shut the quasi Bretton Wood gold window standard in August 1971, current gold prices would only translate to $196.84 in 1971 terms. Extrapolating the previous record high of $850 in 1980 applied to 1971 price levels, we would arrive at $4,529.85.

In short, based on the US Bureau of Labor Statistic’s inflation calculator, current prices of gold would still be very much heavily discounted against current rate of US inflation (in monetary terms).

Importantly, this has yet to factor in the prospects from current policy actions which will eventually lead to more inflation over time.

This would also suggest that there could be immense room for growth in gold prices, if only to reflect on current and future inflation rates.

Predictable Trend: Paper Money Eventually Returns To Zero

The mainstream have been obsessed with their highly presumptive models-capacity utilization, unemployment, wages etc…, all of whom views money as neutral [or where they see money as constant with marginal additions of money as having no effect on prices] and sees inflation as merely expressed in rising prices of goods or services more than a political phenomenon of monetary expansion. Hence, they have all vastly underestimated the impact of inflationary policies.

And this dogmatic fanaticism, which serves as justification for more inflationary policy measures, will risks tilting of inflation towards the extremes.

Moreover, the reality is that the market is far larger than government’s repeated tomfoolery over their constituents, where over the long term, Gold has always maintained its purchasing power against the Fiat currencies which has been imposed on modern society as legal tender (see figure 1).

Figure 1: American Institute For Economic Research: Gold vis-à-vis Currencies of Developed Economies

According to the AIER, ``Apparently many people today believe that all of that is behind us now, that inflating has been curtailed, and that any “embezzlement” of savings currently taking place is something that America’s “forgotten citizens” can live with.

``Anyone inclined to believe this view could benefit from a short course in human history: it is an inescapable fact that throughout known history, there has never, we repeat never, been a fiat currency that over an extended period of time has retained its purchasing power. All irredeemable currencies have in time become worthless, and (except for collectors’ items or rarities) all paper currencies are today worth less than when they were first issued.” (bold emphasis mine)

In the chart above, paper money from developed countries calculated or plotted in terms of US purchasing power has been, over the long run, in a steep decline. François Marie Arouet (1694-1778) prominently known in his pen name as “Voltaire” rightly observed that ``Paper money eventually returns to its intrinsic value -- zero."

This erosion of purchasing power would even have a far worse track record for developing economies. For instance, Brazil already had 7 defunct currencies which makes today’s real the 8^th over its history. This holds true for Argentina whose Peso is the 6^th currency.

So if there is any market or economic trend that is “predictable” or “stable”, it is that paper currencies are all headed for zero, if not extinction. And like most of the modern currencies before today’s extant currencies, demonetized currencies had been mainly due to hyperinflation or war.

But no trend moves in a straight line. And this holds true even for modern fiat paper currencies. Again from the AIER, ``the upswings in some currencies’ U.S. purchasing power between 1985 and 1988 and since 2002 indicate a relative “weakening” of the U.S. dollar against those currencies during that time rather than actual increases in purchasing power in the countries of issue. Moreover, the occasional short-term upturns cannot disguise the longterm erosion of purchasing power of each currency. The historical record is that the world’s major paper currencies, in terms of what they will purchase, today are worth only from about 1/1000th to 1/4th of what they were worth in 1913. By contrast, and despite short-term fluctuations, the purchasing power of gold is above what it was in 1913.” (bold highlight mine)

So gold does track inflation over the long term, but where we depart from the view held by some experts is on the suggestion that gold underperforms other hard assets in an inflationary period because of taxes.

While it is true that volatility from market forces could bring gold to periodical price pendulum swings that may overshoot and or undershoot, due to myriad temporal factors (such as governments’ intervening in the markets), this could serve as windows of opportunity for outperformance.

In other words, if we can “time” gold’s secular bullmarket cycle then we can outperform other benchmarks.

Besides, if today’s prospective economic environment would somewhat shadow the stagflation era of the 70s, then gold and oil would likely be topnotch performers as before.

However from our perspective, in boxing vernacular, the 70s looks likely to be the undercard (prologue) to the main event.

Globalization And The Triffin Dilemma

Some analysts, mostly from the “deflationist” camp, have further downplayed the role of gold as hedge to inflation.

The gist of the argument: During the 80s to the new millennium, as money printing by the US Federal Reserve soared and where the purchasing power of the US dollar has continually eroded, gold hasn’t successfully served its traditional role of “inflation hedge” and has miserably lagged inflation. (see figure 2)

Figure 2: Economagic: Gold As Poor Inflation Hedge?

As you can see gold as signified by the CRB precious metal index (in red), has been in a bear market and has stagnated following its peak in 1980 and has only bottomed out in 1998.

Whereas monetary aggregate US M2 (in green) which has steadily been accelerating upwards, has been reflected in the declining purchasing power of the US dollar (in blue).

Where gold should have reflected on inflation, it hasn’t. Hence, to the deflation camp, the appearance of ‘poor’ correlation has been construed as basis to conclude that inflation and gold have a tenuous link. Although reasons for these haven’t been given.

We have one word answer to refute this claim: globalization.

To understand today’s globalization process we need to begin with the fundamentals of globalization’s fundamental link, the US dollar as the world’s global reserve currency.

The basic function of an international reserve currency is to play the role of providing the medium of exchange not only to the local economy but to the international economy.

This means that the US dollar will have to be issued by the US Federal Reserve in excess of local requirements in order to cater to the needs of international trade or exchange.

Thereby, the basic way to provide liquidity to global economies or to finance international trade is to buy more stuff (import) than sell abroad (export).

Hence, the concept of providing liquidity to fund global trade is the main function of the international currency reserve. Alternatively, this means that the US will have to continually incur deficits with its trading partners by having an overvalued or “strong dollar” policy for as long as the US dollar remains as the principal currency reserve.

And as international trade grows, the US will have to account for larger trade deficits in order to fund or finance these transactions. At the obverse side, trading partners of the US will accumulate US dollar as reserves.

If the imbalances from the said deficits begin to undermine the US dollar exchange value, then the trade deficits will shrink or stabilize to which may jeopardize the role of the international reserve. This is known as the Triffin Dilemma.

Practically all the specifications of the currency reserve conditions as provided for by Yale University Robert Triffin have lived up to his model.

This had been vividly manifested mostly in late 2008, when the US banking system seized up and consequently triggered a collapse in global trade and precipitated the sharp narrowing of the US current account.

The ferocity of the ensuing volatility rippled throughout the global markets- stocks, commodities, bonds, real estate and others virtually crashed. On the other hand, the US dollar spiked as the banking woes triggered a liquidity squeeze while US sovereign bonds rallied hard.

Yet, importantly, the 2008 meltdown likewise manifested a geopolitical response: shrill outcries to replace the US dollar as the reserve currency status by several key emerging market economies!

So as the US dollar liquidity was drained from the near collapse of the US banking system, markets violently responded, and in the aftermath, several political leaders brashly agitated for a new monetary order. This effectively vindicates the Triffin ‘foreign currency reserve dynamics’ Dilemma.

The point is that most of mainstream arguments superficially focus on the current account imbalances, which subsequently pins the blame on currency policies of ex-US trading partners while mostly weasel over the fundamental role of the US dollar as reserve currency and the attendant internal policies that brought upon the crisis.

To wit, one must be reminded that 14 nations have dollarized or have used or adapted the US dollar as their local currency and some 23 countries have been pegged to the US dollar, according to wikipedia.org.

The implication of the US dollar standard is that, in contrast to the fantasies of mainstream, there is no possible rebalancing of the global current account primarily because the current monetary platform does not accommodate for this, as the recent experience have shown.

For as long as foreign transactions are quoted, paid and settled in US dollars, then the nature of these imbalances will have to continue.

And the only way for a rebalancing to occur would be to replace the US dollar standard, not with another fiat money, with no automatic adjustment mechanism from which ultimately will meet the same destiny, such as much ballyhooed IMF’s SDR, but one with a commodity backed currency.

However, replacing the US dollar standard for the purpose of merely mounting a monetary coup d'état against the US won’t likely occur for political and military reasons.

From our perspective the only way for the US dollar to lose its monetary hegemon is via the same path of where most currencies meet their end; a massive inflation, or at worst, hyperinflation.

Globalization Soaked Up US Inflation

The other point pertinent to gold is that the inflationary measures undertaken by the US Federal Reserve during the 1980-2006 came amidst where Deng Xiao Peng declared his celebrated catchphrase “To Get Rich Is Glorious” and thus opened China to the global economy in 1979.

This was followed by the open door policies or economic liberation reforms of India in 1991 and the collapse of the Berlin Wall (1989-1990) which paved way for the deepening of globalization trends.

As global economies opened up, the supply of goods and services, labor and migration flows, financial intermediation and capital flows became more deeply integrated and thereby produced a far larger output (see figure 3) than the monetary policies engaged by the US central bank.

Figure 3: World Trade Organization: World Export and Global Trade

Global Exports sharply accelerated during the 1990s, which underpinned almost the same degree of expansion in Global GDP per capita.

So increased global trade meant more US dollar financing, as manifested by the burgeoning trade deficits, yet the increased output from the world resulted to higher productivity and thus generally growth deflation or “disinflation”. Ergo, lower gold and commodity prices.

According to the World Trade Organization (2008 World Trade Report),

``A key driver of globalization has been economic policy, which resulted in deregulation and the reduction or elimination of restrictions on international trade and financial transactions. Currencies became convertible and balance-of-payments restrictions were relaxed. In effect, for many years after the end of WWII it was currency and payments restrictions rather than tariffs that limited trade the most. The birth of the Eurodollar market was a major step towards increasing the availability of international liquidity and promoting cross-border transactions in western Europe. Beginning in the 1970s, many governments deregulated major service industries such as transport and telecommunications. Deregulation involved a range of actions, from removal, reduction and simplification of government restrictions, to privatization of state-owned enterprises and to liberalization of these industries so as to increase competition.

``In the case of trade, liberalization was pursued multilaterally through successive GATT negotiations. Increasingly, bilateral and regional trade agreements became an important aspect of (preferential) trade liberalization as well. But many countries undertook trade reforms unilaterally. In the case of developing countries, their early commercial policies had an inward-looking focus. Industrialization through import substitution was the favoured route to economic development. The subsequent shift away from import substitution may be owed partly to the success of a number of Asian newly-industrializing countries that adopted an export-led growth strategy, but also partly to the debt crisis in the early 1980s, which exposed the limitations of inward-looking policies.”

In other words, the deepening globalization trends allowed more citizens of the world to increase wealth generation.

As for the Americans, by financing global trade, they were graced with more selection of goods and services at far more affordable prices.

In addition, US dollar accumulations of emerging or developing nations were recycled back to finance US deficits because the US had deeper and more sophisticated markets, aside from domestic policies aimed at anchoring directly or indirectly to the US dollar by several key developing economies for market share purposes.

More proof of globalization’s absorption of the US dollar…

Figure 4: WTO: Financial Flows to Developing Countries

The explosive growth from Foreign Direct Investments (FDI) in developing countries had been manifested in the mid 90s but slowed during the dot.com bust. Nevertheless, FDI’s to developing nations in the early 90s served as a staging point for the spectacular surges.

To add, worker remittances also had a near parabolic ascent over the same period, operating under the globalization dynamics.

Overall, the early phase of globalization, where emerging economies with vast economies of scale integrated with developed economies, resulted to intensive increases in economic efficiencies.

This virtually accommodated the expansionary policies by the US Federal Reserve which resulted to lower gold and commodity prices.

Thus, gold prices had been muted then as “disinflation” from productivity generated growth dominated the global arena. But nevertheless in contrast to the allegation, gold hasn’t been stripped of its role as an inflation hedge.

Are Bond Yields Implying Deflation?

Many analysts from the deflation camp have also been harping on the brewing inconsistencies between the performances of US sovereign markets relative to global stock markets and commodity markets.

They say that since US sovereign instruments have been rallying along with global stocks and commodities, one of the two groups must be wrong.

For them rallying US bonds signified fear or flight to safety from the specter of deflation, whereas rallying stocks and commodities implied the opposite -economic growth, and thus, inflation.

Further they allege that such divergences favor bond investors more than stock market investors because the former is more “reliable” or “credible” or “sophisticated” or “intelligent”.

Because they mostly adhere to the model of Japan’s ‘lost’ decade or the Great Depression as an outcome for the economic environment, they emphasize on the impotency of global central banks or government actions on the predicament of intractable debt which burdens consumers and the banking system of the US and parts of Europe.

We have lengthily argued against these in Investment Is Now A Gamble On Politics. For us both Japan and the Great Depression are unworthy models of comparison.

Today’s landscape is far more globalized than during the early days and that globalization has somewhat coordinated global central bank actions which could lead to the possibility of more traction from largely synchronized policies.

Nonetheless recent actions in the bond markets appear to “validate” rather than contradict our inflation risks outlook.

Figure 5: stockchart.com: US Treasury Yields Spike!

Across the yield curve, US treasuries have dramatically spiked last week!

While almost every market today have been politicized, as the visible hands of government seems ubiquitous, there is no market as deeply and directly involved with US government as the US sovereign and agency bond markets.

The reason for this is that the balance sheets of the US banking system have been stuffed with sundry assets of different quality, most of them are rubbish. Hence government directly intervenes in these markets to avoid major bank failures by buttressing the banking sector, in order to generate systemic liquidity, to help banks recover profitably from trading on spreads, and hopefully to reanimate the largely impaired credit system.

Similarly, policymakers attempt to control real estate prices from seeking its natural levels or from going lower by acquiring mortgage assets.

As Assistant Professor Philipp Bagus recently wrote, ``The financial crisis was caused by solvency problems that led to a liquidity constraint. Central banks tried to fight this by increasing the availability of liquidity and buying or loaning against the same bad assets that caused the solvency problems. If central banks sell those assets again or stop accepting them as collateral, the same solvency problems will reemerge, along with the preexisting liquidity issues. Paradoxically, by buying and accepting bad assets, the central banks did not fix the solvency problem: they merely delayed the inevitable. The bad loans did not turn "good" by changing hands or being accepted as collateral by central banks. Hence, the problem remains and exit strategies can only be successful if the quality of these assets changes or their quality is acknowledged and banks are recapitalized accordingly.”

In short, by levitating markets the US Federal Reserve hopes that risk appetite would radically improve for the Fed’s position, so as it would be able to unload or dispense of the bad assets accrued within the system.

Unfortunately, the Fed seems stuck with monetizing government debts in the face of additional pressures in the economy.

As we earlier pointed out, the US Federal Reserve is supposed to end its Quantitative Easing (QE) program on its self imposed quota on purchases of $300 billion worth of US treasuries. However, it also declared to extend a significant part of the program in order to complete its purchases on $1.25 trillion worth US mortgages.

Figure 6: Federal Reserve of Cleveland: Federal Reserve Purchases

But data from the Federal Reserve of Cleveland shows otherwise (figure 6).

The blue arrow pointing to the red ellipse shows that the US Federal Reserve has been buying in excess of the $300 billion quota for third time. This means that these purchases were not accidental but deliberate. The Fed has acquired about $2.631 billion above its goals.

Meanwhile, the black arrow also shows of the purchases of mortgage securities by the Fed under the present QE program which is slated to end in early 2010.

In the Fed balance sheet watch, the Wall Street Journal sees the same developments,

``The Fed expanded its purchases of Treasurys and agency debt, though its holdings of mortgage-backed securities declined for the second straight week. The Fed started a program in March to ramp up such acquisitions in order to keep long-term interest rates low. The central bank announced in August that it will be buying more Treasurys through the end of October, and said last month that it will be buying MBS into 2010.”

Perhaps one of the reasons behind the recent spike across the yield curve in US sovereign securities could be imputed to the market interpretations of the FED as ending its support on US sovereign papers. This eclipses the a strong economic growth revival in its economy.

But a surge in sovereign yields could affect mortgage rates and could put renewed pressure on housing and commercial real estate (CME) prices. And a disorderly surge in treasury yields could also ripple to other markets.

One must be reminded that the inflationary policies acts like a pyramiding mechanism which requires more and more accelerated amount of inflation in order to support specifically targeted prices in an unsustainable system propped by artificial stilts.

As Credit Bubble Bulletin’s Doug Noland rightly observed, ``Our policymakers have much less flexibility in the new financial and economic landscape. Both fiscal and monetary measures have lost potency. Trillions of dollars of deficits, zero interest rates and a $2 Trillion Fed balance sheet today get less system response than hundreds of billions and a few percent would have achieved previously. This hurts the dollar.”

Hence, reading through the bond markets when they are directly manipulated by governments would represent as serious misdiagnosis. That’s because these markets have effectively been politically choked which doesn’t reflect on market prices. Eventually imbalances accruing from these will implode.

Moreover, we should expect the US Federal Reserves to continue with its QE programs, regardless of the self imposed quota, simply because the guiding economic ideology, the recent triumphalism, biases derived from research (e.g. anti-deflation tools: printing press, zero interest rates) and importantly, political pressures from the banking industry and/or the political leadership have all converged to incentivize the chief policymakers to take on the risks of an “inflation” route.

Lastly, fighting the FED looks myopic.

US Fed Chair Ben Bernanke looks dead set at taking on the “nuclear option” of jumpstarting the US economy by sparking inflation via devaluation.

This clearly is in his guidebook. As Mr. Bernanke pointed out in his 2001 ‘Helicopter’ speech, ``Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.” (emphasis added)

Importantly all of the prescribed weapons from Mr. Bernanke’s diagnosis against a deflationary outcome, patterned after the Great Depression, seem in place:

1) avoiding mass failures of the banking system. This by taking equity stakes in key financial institutions, aside from exercising diverse roles as the lender, market maker, buyer and investor of last resort via different alphabet soup of programs,

2) adopt zero policy rates,

3) apply an extended period for zero policy rates,

4) run large fiscal deficits

5) seek to further consolidate and expand the powers of the Fed and lastly,

6) use the printing press through QE programs

All these seem potent enough to ensure for the US dollar to massively devalue.

However, the problem is that the US dollar in the 1930s had been anchored to gold.

Today, the US dollar has essentially replaced the function of gold as the world’s anchor currency.

And global governments may not tolerate the US to unilaterally devalue at their expense. And as we pointed in King Canute Effect: Lagging Peso A Consequence Of Central Bank Intervention, as Asian Central Banks including the Philippines have tacitly embarked on interventions in the currency markets to stem the rise of the national currencies.

Ultimately, all these collective policies to “reflate” the system risks, not deflation, but hyperinflation.

As J. Kyle Bass of Hayman Advisors LP fittingly wrote,

``Western democracies, communistic capitalists, and Japanese deflationists are concurrently engaging in what may be the largest, global financial experiment in history. Everywhere you turn, governments are running enormous fiscal deficits financed by printing money. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero). There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.” (bold highlights mine)

Hence, the thrust to devalue the US dollar enhances the risks of accelerated inflation which may eventually tip the financial and economic scale towards our critical-‘Mises moment’.

And this translates to massively higher gold prices not only on inflation concerns but at the risks of a global currency crisis.

I’ll end this quote with a repeat reminder from Mr. Ludwig von Mises on stoking perpetual booms, ``The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system”

Asia's Economic Growth Engine: The Muslim Factor

This interesting chart/commentary from the Economist on world Muslim population.
From the Economist, (bold emphasis mine)

``THE total number of Muslims in the world is 1.57 billion, nearly a quarter of the global total, according to a new survey of the world's Muslim population by the Pew Research Center. Almost two-thirds of Muslims live in Asia, with Indonesia providing the biggest contingent (203m), followed by Pakistan (174m) and India (160m). One of the more surprising finds is that the European country with the highest Muslim population is not France or Germany, but Russia, where 16.5m adherents of Islam make up nearly 12% of the total national population. Compared with other studies, the report gives a lowish estimate for the number of Muslims in France (3.6m), as it does for the United States (2.5m); in both those countries, secular principles make it impossible to ask religious questions on a census."

Here is another chart from Pew Research...

To add some comments from Pew Research

``More than 300 million Muslims, or one-fifth of the world's Muslim population, live in countries where Islam is not the majority religion. These minority Muslim populations are often quite large. India, for example, has the third-largest population of Muslims worldwide. China has more Muslims than Syria, while Russia is home to more Muslims than Jordan and Libya combined.

``Of the total Muslim population, 10-13% are Shia Muslims and 87-90% are Sunni Muslims. Most Shias (between 68% and 80%) live in just four countries: Iran, Pakistan, India and Iraq....

``The Pew Forum's estimate of the Shia population (10-13%) is in keeping with previous estimates, which generally have been in the range of 10-15%. Some previous estimates, however, have placed the number of Shias at nearly 20% of the world's Muslim population.³ Readers should bear in mind that the figures given in this report for the Sunni and Shia populations are less precise than the figures for the overall Muslim population. Data on sectarian affiliation have been infrequently collected or, in many countries, not collected at all. Therefore, the Sunni and Shia numbers reported here are expressed as broad ranges and should be treated as approximate."

Why do I find this interesting?

Because if emerging markets or Asia will serve as the world's economic growth engine, then the economic framework will emanate from vastly diverse cultures, religions (as the Muslims) and the political regime that underpins this.

This is far from the Western models, which we have been accustomed with, which would also alter the approach to contemporary analysis.

Besides, another very important factor would the character of marketplace in both the real and financial aspects-such as the resurgent Islam bond markets (Shariah compliant).

So the emergence of Asia, which incorporates the biggest segment of the world's Muslim population, will come with challenging heterogeneity and complexity.

China 60th Year: Before and Today

On its 60th founding anniversary, Redden of Fast Company provides us with a great graphic illustration of China in 1949 (under Mao Zedong) and the vastly different China today.

Great stuff!

Canada's Banks Outperform

Interesting observation from Bloomberg's Chart of the Day.

This from Bloomberg, (bold highlights mine) ``The CHART OF THE DAY shows bank stocks in Canada’s Standard & Poor’s/TSX Composite Index have recouped almost all of their losses since Aug. 8, 2007, the day before credit markets began seizing up. The nine stocks in the bank index trade at 91 percent of their level on that day, rebounding from a six-year low on Feb. 23. That compares with 53 percent for the MSCI World Bank Index and 35 percent for the S&P 500 Banks Index.

``“It’s easier to be comfortable in the banking sector in Canada, because while they all have different strategies, they are all relatively conservative,” said Todd Johnson, who helps manage C$125 million ($115 million) at BCV Asset Management in Winnipeg.

``Canada has the soundest banking system of the 133 countries surveyed in the Global Competitiveness Report of the World Economic Forum, which runs the Davos meetings of world leaders. The U.S. ranks 108th. No Canadian bank has failed since the early 1990s, and none of Canada’s 21 domestic banks has asked for a government bailout.

``Royal Bank of Canada, the country’s largest lender, surpassed its August 2007 stock price on Aug. 27, and last week reached the highest price since July 2007. National Bank of Canada, the nation’s sixth-biggest bank, only needs to rise 1.3 percent to reach its Aug. 8, 2007, level. National Bank has surged 88 percent in 2009, the most among lenders in the S&P/TSX and S&P 500."

Aside from liquidity issues, sound banking have been rewarded by the market.

King Canute Effect: Lagging Peso A Consequence Of Central Bank Intervention

For a while, we have been in a quandary about the status of the Philippine Peso, as the Peso has severely lagged the region in terms of performance.

Notwithstanding, based on conventional metrics, there doesn’t seem to be any persuasive parameters to argue for a stronger US dollar, especially under today's extraordinary loose or highly liquid environment.

We have argued in Not Just A Bear Market Rally For Philippine Phisix or Asia that ``The Peso’s woes can’t be about deficits (US has bigger deficits-nominally or as a % to GDP), or economic growth (we didn’t fall into recession, the US did), remittances (still net positive) or current account balances (forex reserves have topped $40 billion historic highs) or interest rates differentials (Philippines has higher rates)."

And we have ascribed the lag in the Peso to local central bank manipulation- out of political motives in order to paint a strong economy going into elections, as well as for a grand exit for the incumbent (if the election pushes through).

And possibly too, for the desire to keep the Peso down, as prescribed by our mainstream economic experts, who mostly tow the 'mercantilist' persuasion, to sustain the purchasing power of OFWs (who account for ONLY 10% of the economy at the expense of the rest).

Well, the idiomatic "cat is out of the bag". In anecdotal terms (not direct evidence), the BSP could have indeed been manipulating the Peso...

This from Wall Street Journal (emphasis mine),

``Many of America's trading partners, however, are pushing the other way. In Asia, traders said central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar's fall against their currencies.

``Asian officials fear that the dollar's fall could crimp their export-driven economies. "The [Thai] baht has appreciated a little too rapidly compared with our fundamentals," said Suchada Kirakul, assistant governor of the Bank of Thailand."

In other words, despite the interventions, the Peso's latest strength simply signifies as too much market pressure against the US dollar for the BSP (local central bank) to control.

Reminds me of King Canute (or Gnut the Great) who, according to a legend, ordered the ocean waves to stop advancing. (King Canute wanted to prove to the courtier- sycophants that his power is limited).

Lesson: Market is immensely larger and more powerful than central banks.

Gold's Record Run Is A US Dollar Affair So Far

Another interesting outlook from Bespoke Invest on Gold

According to Bespoke, ``While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros and Yen. As shown in the charts, the price of gold is up considerably over the last five years, but the recent run has only been strong in dollar terms. This indicates that the strength is solely a function of a weaker dollar rather than any real pickup demand." (emphasis added)

Additional comments:

As Bespoke noted, gold's rise so far has been a 'pass through' effect from a weak dollar.

Alternatively, this means that gold has so far underperformed the Euro and the Yen.

Also, this appears to be an "interim" trend than a secular trend.

Lastly, given that this short term phenomenon has been insulated to a seeming "US dollar event" so far, this also implies that the impact from policies to collectively devalue currencies (a.k.a. global currency war) hasn't been evident yet.

Applied to asset markets, this could suggest that inflation is still on a 'sweet spot', and would thus, seem favorable for further upside moves.

Successful Investing Is Boring

I fancy Jessica Hagy's Indexed blog. That's because Ms. Hagy can depict life 's paradoxes in simple but thought provoking art-like graphics.

This Normal is Boring is an example.

We can apply this to investing.


Simply substitute "Weird" with "Depression" and "Beautiful" with "Euphoria" then we come up with up with the theme: Successful investing is BORING!

Why?

Because successful investing should go against pulsating high risk momentum, sound bytes and popular opinion predicated on superficialities.

To quote on Warren Buffett (Tilsonfunds),

``I've seen nothing to improve on Graham and Fisher. Just think about stocks as a business and then evaluate that business. This requires insulating yourself from popular opinion." (emphasis added)

And to further quote John Maynard Keynes,

``Moreover, life is not long enough;- human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll." (bold emphasis mine)

In short, one should focus on minimizing risks and optimizing profits which require equanimity and the avoidance of gambling instincts, all of which would should make investing...quite a boring stuff.

US Dollar Looks Increasingly Like An Orphan

I don't know how valid this report is, but if this true, then behold we could be witnessing the end of the US dollar as the world's currency reserve regime sooner than anyone expects.

This from Robert Fisk of The Independent

(all bold emphasis mine)

``In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

``Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

``The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years."

What used to be an isolated move by Iran to price oil transactions in US dollar appears to be generating a different flavor of the same theme, but this time with a broader following.

More from Mr. Fisk ``The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

``This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves."

Again if this report is anywhere true, it would suggest not only a momentous shift away from the US dollar regime but likewise, an abandonment of ertswhile allies of their patron, or importantly, a seeming realignment of geopolitical forces that depends less on the US.

I recall John F. Kennedy's remark, "Victory has a thousand fathers, but defeat is an orphan."

From the development cited above, the US dollar looks increasingly like an orphan.

Typhoon Ondoy: Market Fallacies and Risks

``The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.”-Milton Friedman, An Economist’s Protest

Nothing captures the human mind more than the huge events.

And huge events frequently spawn oversimplistic explanations on everything that accompanies this.

For instance in the realm of the stock market, natural catastrophe or disasters have often been equated to lower prices, for the simple reason that such dislocations are deemed to “hurt” earnings or the domestic economy.

Plausible as it seems, however this exemplifies our populist “ipse dixitism”.

Fallacy of Natural Disaster Equals Lower Stock Prices

The Philippines is home to typhoons or tropical cyclones or “Bagyo” in local vernacular, where about an average 6-7 of them lay scourge to the country annually.

The table above from wikipedia.org enumerates on the deadliest and the most destructive of the typhoons that had afflicted the country in terms of deaths and estimated damages in Peso (albeit the estimates of Peso damage doesn’t specify whether prices are reckoned from current or constant “real” terms).

However this interesting trivia from wikipedia.org, (bold highlights mine)

``The most active season, since 1945, for tropical cyclone strikes on the island archipelago was 1993 when seventeen tropical cyclones moved through the country. There was only one tropical cyclone which moved through the Philippines in 1958. The most frequently impacted areas of the Philippines by tropical cyclones are northern Luzon and eastern Visayas. A ten year average of satellite determined precipitation showed that at least 30 percent of the annual rainfall in the northern Philippines could be traced to tropical cyclones, while the southern islands receive less than 10 percent of their annual rainfall from tropical cyclones.”

So how did the top 3 worst typhoons, which occurred mostly during the early 90s, impact the domestic stock market?

The worst in terms of fatalities would be Typhoon Thelma or codenamed Uring, which slammed the country in November 1991 with an estimated 5,000-8,000 death.

However in terms of estimated property damages, Typhoon Mike or codenamed Ruping (November 1990) and Typhoon Angela codenamed Rosing (November 1995) had been recorded as the largest, with over Php 10.8 billion each (with a marginal spread between the two).

Three noteworthy observations from these typhoons on the Phsix:

One, over the short term, the impact from these typhoons had generally been a carryover of the interim trend.

Typhoon Mike and Thelma traded sideways reflecting on the trends prior to their occurrences, while Typhoon Angela traded downhill also reflecting on the prior trend.

Second, in the wake of the three worst catastrophic typhoons, in the medium term (1-2 years) the Phisix surged!

A Pollyanna could even make a misleading conclusion that typhoons are ‘beneficial’ to the stock market! However, as a word of caution: correlation doesn’t imply causation.

And lastly, over the longer term, these typhoons merely reflected on the secular trend of the market.

Since all three typhoons were at that time operating under the secular bull market cycle from 1986-1997, hence the general trend was up.

In short, in contrast to the popular “available bias” of equating “calamity equals poor stock market”, the typhoon’s impact to the stock market has largely been immaterial over all timeframes considered and tends to reflect on the major trends from which undergirds the stock market cycle.

Typhoon Milenyo And 2004 Indian Ocean Earthquake As Added Exhibits

More proof.

Conditions of the 90s have been significantly less similar than today in the age of the iPod, twitter, facebook or the internet and the epoch of globalization (in spite of the recent crisis).

So we’d make two recent comparisons: one local and an international event.

The latest typhoon that appears to have an almost parallel degree of havoc to last week’s fateful Typhoon Ketsana or codename Ondoy, to the National Capital Region of the Philippines was Typhoon Xangsane or codenamed Milenyo in late September of 2006.

Again according to wikipedia.org, ``In all, Milenyo was responsible for 197 deaths and 5.9 billion Philippine pesos ($118 million, 2006 USD) in damage, mostly to personal property and agriculture.”

The difference is that most of the destruction and loss from today’s tempest had emanated from intensive rainfall that had induced massive instantaneous flooding than from Milenyo’s calamitous winds.

In addition, the death toll from Ondoy has now reached 280 as of October 1, according to the Inquirer. This would be larger than the Milenyo experience, but would still account as vastly lower than 9 out of 10 of the list in the top 10 of the most devastating typhoons to slam the Philippines.

Typhoon Ondoy seems closing in on Typhoon Babs or codenamed Loleng during October 1998 which ranked 6^th which tallied 303 deaths.

Typhoon Milenyo had basically the same traits as cited above from the “worst” predecessors as reflected in the Phisix.

The precursor trend determined the short term actions. The medium term move was a significant advance and the long term manifested the secular trend-up.

Incidentally, Typhoon Loleng of 1998 had the same short and medium term impact albeit the long term reflected anew on the major trend-down (that’s because 1997-2002 was the bear market cycle).

And fundamentally the same dynamics would even apply to one of the worst or deadliest natural disasters in recorded history over the world: December 2004 Indian Ocean earthquake.

Fatalities in the 2004 Indian Ocean Earthquake approximated 443,929, according to the wikipedia.org, which makes it the fifth worst.

The pecking order of the 5 worst disasters ever to hit human history ahead of the Indian Ocean Earthquake are: China’s 1931 Floods which took some 1-4 million lives, China’s 1887 Yellow River Floods which had some 900k-2 million deaths, 1556 Shaanxi earthquake again in China which tallied 830k of lives lost, and the 1970 Bhola Cyclone in Bangladesh which claimed 500k lives.

Indonesia took the brunt of the casualties from the December 2004 Indian Ocean earthquake which had been propelled by the secondary effect of the earthquake-a destructive tsunami.

According to wikipedia.org, ``The Sumatran province of Aceh was severely damaged by the earthquake and resulting tsunami. An estimated 167,736 Indonesians were killed and 25% of Achenese lost their source of livelihood. Banda Aceh, Aceh's capital, was the closest major city to the earthquake's epicenter, and many of its major libraries suffered extensive damage.” (bold emphasis mine)

[I would like to further disclose that wikipedia’s account of statistical figures varies: the list of natural disasters by death toll page indicates an estimated 443,929, while 2004 Indian earthquake page lists 230,000]

Nevertheless the important point is, while the impact of catastrophes is real which has significant economic implications, stock markets seem to have discounted the effects from such human losses and property destruction.

Jakarta’s major bellwether, the JKSE, even immediately rose in the aftermath of the disaster but traded sideways for most of 2005 until it eventually took off by the end of 2005.

Moreover, the devastating earthquake in Indonesia last Thursday which has exacted 1,100 as of this writing left JKSE virtually unchanged as of Friday’s close.

So whether it is typhoon Thelma, Mike, Angela, Xangsane or today’s Ketsana (Ondoy) or the tsunamis from the December 2004 Indian Ocean Earthquake or even the Spanish Flu in 1918-1919 [as discussed in Swine Flu: The Black Swan That Wasn’t], these tragedies have had minor impact to the price movements of the stock markets.

Human Action And Monetary Policies Matter

So why would stock markets seem to overrule the popular impression that “calamity equals lower stock prices”?

We offer two explanations:

One is that this signifies the dynamics of human action.

It is natural for people to speedily work for the restoration of the economic structure.

John Stuart Mill has a magnificent explanation:

``This perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” (bold emphasis added)

While restitution from the natural disasters in rich countries can be financed by medical or insurance coverage on properties affected or on lives harmed or lost, in the poor nations, people rely mostly on social network for aid.

As in the wake of Typhoon Ondoy, it is why tremendous amounts of “private” sector charity (here and abroad) have poured into those afflicted areas.

It is also why there has been a large participation from the wide spectrum of the society to assist in the distribution of relief goods.

Unseen by most, these acts of social cooperation dynamics or the “bayanihan” spirit in local lingo is more than just a manifestation of self esteem or social work goals.

It represents exhaustive efforts towards swift societal rehabilitation for the economic interest of the community [as we explained in Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace]. It is in the interest of almost everyone to see the reversion to a semblance of ‘normalization’ of the community.

In other words, marketplace charity signifies as complimentary function to the recovery of capital impaired by the calamity.

Again John Stuart Mill, ``The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production.” (bold emphasis added)

Hence, markets could have discounted the adverse impact from these disasters as possibly representing an anomaly than from a permanent structural impairment in the economy.

In addition, markets may also have anticipated a relatively quick recovery from the collective rehabilitation efforts to restore the economy as reasons for valuation insouciance.

Another important unseen factor, which has always and seemingly intentionally been glossed over by the mainstream, is the impact of monetary policies on asset prices.

This appears true even amidst the turmoil brought about by natural disasters.

The red arrows in the chart courtesy of the economagic shows of the “Greenspan Put” policies instituted in response by the US Federal Reserve in the face of specific global crisis or to combat US recessions, such as the 1990-91 US Recession (left most shade) and Japan’s Bubble Bust (1990), the Mexican Tequila Crisis (1995), the Asian Crisis (1997), the LTCM (1998) and Millennium Bug scare (1999).

In other words, the easing of the monetary policies in the US which had been indirectly transmitted to Philippine equity assets by way of a secular boom cycle phase. Portfolio flows, which underpinned most of the secular trend, may have offset or cushioned the large scale of losses in the real economy exacted by the natural disaster shocks.

As one would note: The rallies in the Phisix, in spite of the calamity shocks, came in conjunction with the easing cycle of the US Federal Reserve.

It is likely that today’s market environment will trigger the same response as in the past, most especially that monetary easing isn’t just a conduct exclusive of the US Federal Reserve but from global central banks which means this includes the local central bank, the Bangko Sentral ng Pilipinas (BSP).

Further in the wake of the tragedy, I expect local monetary policies to further extend their easing cycle to politically justify on lending to the disaster victims.

Price Controls As Backdoor Entry To Tyranny

The real risks to the market arise NOT from the disaster itself, but from policies assumed by the incumbent government in the face of the calamity.

Considering that the stretch of the damage of Typhoon Ondoy has been significantly less than the damage from similar typhoons in the past, it would normally be a puzzle why a nationwide “state of calamity” had been promulgated by the government.

One of the alleged reasons for the nationwide scope of the state of calamity is because earlier impositions of price controls at selected typhoon affected areas haven’t worked. Producers or traders naturally opted to sell in places which had been free of regulatory controls.

Hence, a nationwide price control policy has been instituted, all aimed at controlling the “greed” of traders. Duh!

Given that our president hails from a respected economic professional background, such reactions wouldn’t be a stranger to her.

In addition, we wouldn’t question her familiarity with the hazards of employing the repeated historical precedents of the failure of price controls.

But alas! Political season is before us. And political expediency has taken precedence over economic priorities, thereby heightening the risks of exacerbating today’s crisis.

Yet mainstream media has virtually been stultified by discounting such government act as being connected to some other tangential electoral issues [see No To Price Controls! No To Despotism!]

Mainstream media have basically neglected the implication that a national price control implicitly “seizes” control of the factors of production.

This means that if such policies further get entrenched, we could be transitioning into etatism or a different flavor of “state” socialism.

In etatism, the largest industries will risk nationalization, especially those producing political goods or services. While the small and medium industries will probably retain their private identity, they will, in effect, eventually become extensions of government operations, whereby the amount of production and prices will all be ascertained by the government.

Further, the failure to control prices from nationwide price fixing would lead next to widespread rationing, universal price fixing (This means expanding the coverage of price controls from politically sensitive goods to general goods. Since shortages will force the public to consume substitutes outside of government controls which will likewise cause price increases, these will be areas which government will expand controls) and massive subsidies, all of which, I repeat, would only substantially aggravate today’s crisis.

Yet, any further signs of these occurring in the political theater, over the coming days, will be foreboding.

Media and the academic economic experts seemed to have forgotten that one way for a prospective tyrant to emerge is through the extensive use of price control instruments as political tool to grab power!

In short, price controls could serve as a backdoor entry into tyranny. Will we risk relapsing into a dictatorship or will we assimilate the socialist models of Latin America?

As Robert Shuettinger, Eamon Butler, Forty Centuries of Wage and Price Controls, ``In Egypt, government controls over the grain crop led gradually to ownership of all the land by the state. In Babylon, in Sumeria, in China, in India, in Greece and in Rome various kinds of regulations over the economy were tried and usually either failed completely or produced harmful effects. One of the most well-known cases of wage and price controls in the ancient world occurred in the time of the Emperor Diocletian. Thousands of people throughout the Empire were put to death before these futile laws were finally repealed.” (bold emphasis added)

And by taking over the reins of the major segments of the economy from the control of the “greedy” private sectors, our political leaders will then require extended police powers for the pervasive enforcement of such political objectives.

And the feedback mechanism between more price controls and more police power would accelerate to cover more and more economic areas and eventually snowball into martial law powers as the whole economy falls into the ramparts of government control.

Considering the twilight of the incumbent political regime, emergency powers aimed to addressing calamity woes could function as fitting rationalization to short-circuit the electoral process.

Effects From Price Controls, Hoping Over Hope

Besides, we should realize that there is no getting around the natural law of economics which principally operates on the world of scarcity.

Eventually, out of the façade of short term fixes will surface the strains from the imbalances built upon superficial structures-the unintended consequences. And this could be vented through a political upheaval.

Moreover, increased used of price controls would eventually translate to heightened risks of inflation-where the real economy will suffer from specific and relative real good shortages combined with mass subsidies and an upsurge in fiscal expenditures for the expanded imposition and enforcement of regulations.

All these would also be expressed in the financial markets.

Although widespread use of said policies would naturally imply for a weaker currency or a weak peso, the Peso’s fate would greatly depend on the relative dimension, or which of the country will do least worst in the race to the bottom. In the Philippines, the conventional exchange rate pair is the US dollar-Philippine Peso.

In addition, we should expect to see below par economic growth, spikes in unemployment, political restiveness and perhaps a lagging stock market-in view of nationalization risks, as investors turn risk averse.

We can only hope that forthright “sensibilities” will sink into consciousness of our political leadership.

And that the temptations of egotistically extending political tenures, by means of maneuvering economic policies as political instruments, would immediately be abandoned.

Aside from lifting price controls, the only way to rebalance the calamity distorted prices is by the liberalization of local trade barriers so that interim shortages will met by a barrage of supplies in response to temporary surges in price signals, which would bring back prices to normal levels.

Hence, the risks of wastage will all be borne by “greedy” entrepreneurs.

And for the genuinely concerned political leadership, these measures would mitigate the burdens of taxpayers by minimizing extravagant and unproductive redistribution and ultimately shield society from the ravages of inflation.

Politics Dictating The Affairs Of The Market, Outlook

For market observers and participants, while many continue to look for entertainment value instead of the real drivers of the marketplace, the role of politics has increasingly deepened its entanglement here and abroad, thereby generating more marketplace distortions that affect both the real and financial dimensions.

Hence we suggest that policy actions will continue to strongly determine the fate of the local and global markets, the local and global economy and even our society’s agility to recover from the recent disaster.

Traditional way of thinking has been loaded with theoretical lapses (e.g. devaluations doesn’t solve disequilibrium simply because currency values are not everything, instead inflationary actions aggravates them), confused definitions (e.g. macro thinking sees the world as operating from one kind of good or product, labor and capital, hence prescribe on simplistic set of solutions cloaked with technical jargon) and selective facts to confirm on tenuously held biases (e.g. rising US unemployment is deflationary to the Philippines!!?? Excuse me).

Domestic political uncertainty, as clearly shown above, and not the deflation menace is the risk for the local financial markets. A move towards a Honduras (political turmoil) or Venezuela (deepening socialism) risks upending present gains.

While Venezuela’s IBVC appears to be up over the past 5 years as seen from the chart above from Bloomberg, the tragedy is that stock market gains are wiped out by the huge spikes of inflation as seen from the chart below from tradingeconomics.com.

This should serve as a basic example on how inflationary policies from socialism will harm investors and the rest of the population or the economy alike than to enable them to achieve fraudulent “noble” social goals.

And political risks equally apply to the international marketplace than from the premises of traditional valuation. (e.g. growing murmurs of a military strike on Iran)

While we still remain net positive on asset prices mostly from the transmission effects from global and local monetary policies, we will have to keep a close vigil over the direction of the present political winds where the risk towards a recidivist dictatorship could constitute as political shock and rattle local markets regardless of exogenous developments, or if present actions have been cosmetically designed at embellishing the highly unpopular political credibility over the interim.

Jim Rickards: Federal Reserve needs to cut US Dollar in half over next 14 years

Jim Rickards managing director of market intelligence for scientific consulting firm Omnis, sees the US dollar cut in half over the next decade or so, in a CNBC Interview. [Hat Tip: TruthFN]

Some notes and excerpts:

Expect: 4% inflation in 14 years that will cut the US Dollar in half
Explains SDRs as solution to the Triffin Dilemma
recommends 10% gold 90% cash
SDRs-printing money but still nothing behind it
No solution for national security implications
Central banks are hoping for a "stable steady" decline of the US dollar and not a collapse


“Unannounced product of G20, the IMF anointed as global Central bank...
"IMF is issuing Debt for the first time in history"
“Displace the dollar with SDRs
“If you own Gold you are fighting central banks in the world. Central banks hate gold because it limits their ability to print money. But the market is the market, the market will do what it wants even the central banks are not bigger than the market.”



My comment:

It seems odd for an expert to prescribe a portfolio of 90% cash and 10% gold when the risk of a dollar collapse is construed as significant.

A dollar collapse means the loss of the basic function of the currency as medium of exchange, store of value and the unit of account on an international scale.

That would only mean inflation going berserk. Who would want to hold cash (US dollar) in an environment where money is rapidly losing purchasing power?

This would seem self contradictory.

Paul Volker: Growth In Emerging World Is Like The US In Terms of Impact To The World

Former Federal Chairman Paul Volker recently interviewed by Charlie Ross at the PBS discussed sundry of topics from the US economy, global economy, global imbalances, the US banking system, emerging markets, US dollar, the Obama administration, taxation and etc...

Here are some excerpts on emerging markets and the US dollar:

``It’s pretty unusual but symbolic in the change of the world, instead of the emerging world being the hardest hit by this crisis, emerging world has been coming out pretty well. Now they’ve built out big reserves so they weren’t financially hit…

``But the growth in the emerging world is quite remarkable and amidst of this turmoil the emerging world together, you know, is like the United States in terms of the impact on the world economy, you couldn’t have dreamed of that 20 years ago, 30 years ago…

``It’s good, on the other hand, it is symbolic or more than symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, in terms of intellectual

``“I don’t know how we accommodate ourselves to it…You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

``They want to be at a table, but coming to table doesn’t create consensus.

``We will wanna import from China we will export to China, we gotta get more balanced relationship too but I don’t think that balanced relationship is inherently antagonistic…[Not a zero sum game] not at all

``But I don’t think no substitute to the Dollar now, unless we screw up and I hope we don’t, but that will the real danger for the dollar…

``The world needs a currency, the financial world is globalized, they are very much interconnected…

``It’s very convenient to have something that you can use right away for another payment and that’s what the dollar serves and that’s why people hold so many dollars…because it is convenient. And it is reasonably stable and convenient and useable and it won’t go away in a hurry."

Part 1 (if video won't activate pls click on the "part 1" link)

Bloomberg has also an account of the interview here.

Part 2 (if video won't activate pls click on the "part 2" link)