Soul Searching In A Currency War

One of the advantages of having this website/blog, is the access to my personal archive of thoughts, ideas and  research.

Few people would remember how they were 3 years ago and re-reading my posts from back then, I realised that things have gotten much worse on the generally labeled currency wars .

Switzerland just walked away from it but the rest are entering the fray, China the latest with their 50 bp cut in the RRR requirement of their banks, coming shortly after Australia cut their interest rates to the lowest ever (still 2.25% !!).

List of central banks that have eased this year :


List of central banks which RAISED RATES in 2015 :

Trinidad Tobago

And the schedule is a heavy one, not to mention the surprise cuts along the way.

central banks schedule till mar

Back to what I was writing about in 2012.

Back then, we had higher commodity prices, higher bond yields, in other words, Inflation.

Currency wars are not officially declared and do not lead to loss of lives, directly. It may be a long while eroding spending power lead people to come to that conclusion. It is not something many governments have control over, in the “beggar my neighbor” game. It is to beggar or be beggared.

The themes then.

“1. excess liquidity from QEs, LTROs, BOJ, BOE and PBOC that is not available to the masses,

2. decreased purchasing power,

3. increasing youth unemployment,

4. increased household debt,

5. slowing growth globally now spreading to the BRICs,

6. increasing minimum wages in EM”

And also the recurring theme of The Age of The Dollar is About To End before QE3 came along.

You see, the entire business of currency wars start at 1 point and I am not too bright so I had to search to find a simple way to understand it and I was really lucky to strike on a goldmine in a really dumb-ed down Joseph Stiglitz presentation, for the Nobel prize that he had won.

stiglitz 1stiglitz 2

So I wrote a little story about the imbalances.

There was once an Ant and a Grasshopper.
The Ant worked in Summer while the Grasshopper played. When Winter came, the Grasshopper ran out of food and the Ant makes a lot of money selling his food to the Grasshopper which the Grasshopper bought on credit.

The Grasshopper had helped the Ant in the past, building his home and giving him aid. Now the Ant, who has built a better home for himself, does not want to lose it by helping the Grasshopper who is running low on credit.

Roubini recent piece gives us great insight.

“Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall. So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.”

Back in 2012, people were grabbing all the gold and commodities, art, stocks, real estate because of fear.

From personal experience in markets, Uncertainty usually leads to Fear. And Fear leads to Panic or Hysteria. (On the other hand, Certainty leads to Delusion which leads to Over Exuberence ?)

The most expensive painting sold in the world was back in 2011,  $ 250 mio for a Cezanne.

But the currency wars ended then.

Because Bernanke threw down Operation Twist 2 in Jun 2012 and QE3 in Sep 2012. The bazooka silenced the rest of the countries whose attempts at devaluing their way to prosperity would be futile against the wall of cheap money from the US.

It Is Different This Time

Because the FED has only 2 options now – Do Nothing or Hike Rates. Doing nothing is just as good as a rate hike against rate cuts everywhere.

This would mean that we can go back to the textbook formula that Abenomics is based upon. If your currency weakens 10%, your exports would be cheaper and you have instant 10% gain in profits as well as 10% gain in inflation.

The US will go back to its former deficit status (Grasshopper) and we will have peace on earth even though Stiglitz thinks it is not a sustainable situation yet, it will be probably after our lifetimes.

stiglitz 3In 2012

The trick was to “borrow money. Borrow as much as you can afford because it will only be cheaper to pay back tomorrow. If you are as lucky as Greece, you may not even need to.

Buy as much assets that do not have anything to do with money, and that probably excludes banking shares, which leads me to conclude that Gold and Silver are as good a bet as any.”

Bill Gross had these investment ideas then.

(1) Real as opposed to financial assets – commodities, land, buildings, machines, and knowledge inherent in an educated labor force.
(2) Financial assets with shorter spread and interest rate durations because they are more defensive.
(3) Financial assets for entities with relatively strong balance sheets that are exposed to higher real growth, for which developing vs. developed nations should dominate.
(4) Financial or real assets that benefit from favorable policy thrusts from both monetary and fiscal authorities.
(5) Financial or real assets which are not burdened by excessive debt and subject to future haircuts.

The real risks we are running from is Fear. Because if fear sets into the market mindset, there will be a mad exodus just like we witnessed in Argentina where the citizens were buying BMWs and Rolexes as stores of value. We had the same Rolex experience in Singapore just last month after the SNB un-pegged themselves and Rolexes will be more expensive again now that MAS has slowed down the appreciation of the SGD.

Speculative attacks are next. Singapore is an excellent sitting duck because it is the only AAA country left, other than the US, that is still on an appreciation path, albeit a slower one of 0.5-1.5%.

And for those AAA (good) countries that have a lot more room to go down to zero, like Australia, we can expect markets to force the hand of the central bank with carry trades off their 2.25% bank rate against the 0% or even -0.75% (Switzerland) that we get from other countries. 😉 that should explain the massive rebound we saw in the AUD after their unexpected rate cut.

Market darlings like India and Indonesia should weather well but the risk of panic is High from a massive erosion of confidence this time because we have entered an era of stagnating growth that cannot be saved by the pursuit of Abenomics on a global scale, not with China looking peakier than ever. At most, it will result in a quarter of positive growth from the depreciating currency effect.

Therefore it will still be the USD, till the next FOMC in March, Gold and Silver, safe haven bonds that do not give a negative yield (suggest Singapore and Australian govis). Not many choices because property loans are hard to get and real estate is a long term love affair.

If only we could go back to the promises of 2012 …..