Ad Hoc Commentary – Heirs of Mao and the Japanese Jinx
In the past few weeks, we likely saw a bear market rally. Most of the bears finally gave up when they heard QE3. Nevermind that the latest round of QE is underwhelming in size and scope. The bears just threw in the towel and asked questions later. Bears likely flocked to gold, ignoring the wider sell-off in commodities.
Yours truly is still bearish till year end. Might had been early to the call by a week or two. What is remarkable is that easing by G7 (Fed underwhelming QE3, BoJ buying bonds in desperation, ECB promise of unlimited bond buying to stem contagion) did not inspire large scale risk-on. Our favorite barometer, the Dow Jones Industrial, failed to make new highs after the impulsive short covering post QE3. The index even made a weekly loss the week following QE3, and looks likely to post another weekly loss tonight.
We said it will be Jackson Hole disappointment, followed by EUR euphoria and then Japanese jinx. Currently we are past the euphoria and waiting on a Japanese jinx. That would likely mean October will be a period of very high volatility. Those who are complacent about the China-Japan standoff should read the book written by Henry Kissinger entitled ‘On China’.
Being economically important to each other is irrelevant. Germany and Britain started World War 1 despite the then prevailing view that they are too important to each other economically. What matters is perceived ability to win, and a realization that we are dealing with the heirs of Mao (not Confucius):
“In Mao’s interpretation of history, the Confucian order had kept China weak; its ‘harmony’ was a form of subjugation.” pg 96, Henry Kissinger On China
“Traditional Chinese political [Confucian] theory held military force in relative disesteem and insisted that Chinese rulers achieved stability at home and influence abroad through their virtue and compassion. Mao, driven by his [Maoist] ideology and his anguish over China’s century of humiliation, produced an unprecedented militarization of Chinese life.” pg 94 Henry Kissinger On China
Of course we are unlikely to go into traditional warfare. A traditional war would be repeating the mistake of Europe in WW1 and WW2 to the benefit of American businesses. What is likely is an economic war. China likely knows that Japan is in a very precarious position. Once the European sovereign debt crisis is ‘solved’ by whipping Greece and huddling together with the rest, the bond vigilantes will go on a hunt. Perhaps in the Chinese calculations, economic warfare on Japan will open up the can of Japanese Government Bond worms.
Good luck in the markets.
Is there a currency war going on ? China killing the JPY ? I cannot think of any other more devious animal than the Rogue Panda trader waiting to be nabbed like the London Whale.
You can’t have a war when everyone wants to be the loser and not the winner, my dear. Why else is every central bank and his dog doing QE these days? You don’t think a RRR or CRR cut by PBOC or RBI not QE? It’s the same. Maybe the only central bank hero here is the MAS. We shall wait to see in a couple of weeks’ time.
No, I think no one wants a recession. Even if you’re a central bank governor, you somehow feel for your personal job insecurity to do the right thing for the long-term good. The whole world is suffering from short-termism now. We are in a multi-cycle, multi-crisis, correction phase. There will not be any winning currency. While the lessons of Bretton Woods are still too fresh in our minds to contemplate going back to the pegged world, you cannot rule out the possiblity that another 10 years down the road, people might throw in the towels – like the bears mentioned in the article – ok, let’s go for a peg. Then people may say, the Europeans weren’t wrong. What’s wrong was that they lied about their weights and heights when entering the partnership.
We all come from different schools of thoughts. Over the years, I’ve come closer to the Real Business Cycle (RBC) school of thought – what goes up, must come down and vice versa. No policy intervention is better than too much intervention. So on the same note, I think pegged system is a disaster. But history repeats itself. The longer we drag, the more likely we go back to Bretton Woods – only to break it 30 years later and then float again. It’s what keeps FX traders employable and quacks like me writing.
Just read this comment. Good stuff.
How do you value a currency ? Such as the SGD ?
Now that the central bank has spoken.
I believe it is just as good as the next USD you can buy ? Or as good as long as the psf prices for Raffles Place holds up ? Or as good as the blind faith that everyone who does not understand the fx policy has that they are doing the right thing ?
Market can stay irrational longer….
Good one. You can’t have a war with everyone wanting to lose. But I guess not all printers print at the same pace eh? With regards to the the central bank hero, I think the Aussies are way behind the curve as well =)
I think none of the above matters once Israel lobs a bomb over… everything else would seem trivial. Think it is unlikely? Think again. No other region has as many conflicts since the last world war.
Also, it seems that everyone wants to get in on Gold. 9/10 people think gold would be the best investment for the next decade. Sounds familiar doesn’t it.