Dying For Their Money
This post was published first in www.ezfx.com and reproduced with permission.
A good friend of mine just returned after celebrating Xmas and New Year’s day in Bhutan, not before unsentimentally liberating herself of all her Ngultrums (pronounced New-Trums) which is hard word to pronounce and an even harder to source outside of Bhutan for all the 25 pages of their foreign exchange regulations.
For a currency that only matters to about 800,000 people in the world, folks who probably would not hesitate on getting their hands on the USD or the Indian rupee, we get to wondering if a currency matters if it is going to be as good as the people who are using it. Currencies like the Ngultrum, which has little consequence outside of Bhutan where per capita GDP is about US$2,420 although few earn over US$200 a month.
Upon entry into Bhutan, you can convert your foreign currency notes into Ngultrums at the bank counter which takes a discount of 5-8% on “small notes” such as the USD 1 to 10 notes against the larger denominations of US 50 to 100, noting that only “clean” or relatively unsoiled notes will be accepted.
2016 was a big year for the death of paper money, the €500 note in the first half and the 500 and 1000 rupee notes in the second half, an unsystematic and unsympathetic process which has led to scores of reported and, probably, even more unreported deaths in India (55 reportedly died, according to Quora, and another 11 bank officials who died due to the stress of the national exercise), and Indian gold addicts congratulating themselves on their foresight.
What a way to redistribute wealth when we think about the thousands of cases of fraud or crime or corruption as folks brandish their cash in broad daylight in an infrastructurally-challenged country ? In a clean sweep and redistribution of dirty money wealth too ?
That was the complaint of my good friend who read that she could take some Indian Rupees along with her until she found out that cash Rupees notes cost about 10% more than the market exchange rate because of the national Indian cash exercise that has led to overwhelming demand for the small notes.
That says so much about the cash notes business in times of distress, when we have the Zimbabwean 1 trillion dollar note (worth about US 40 cents) selling on EBay, along with the 10 and 100 trillion note, for about US 40 dollars as a novelty, as the country abandoned their currency altogether, for the 4th time since 1980, back in 2009, introducing a multiple currency framework of foreign currencies.
Source : Ebay
In their desperate fight against hyperinflation, Argentinians were stocking on up BMW’s and Jaguars back in 2013 as its citizens race to find a store of value for their rapidly depreciating currency. That has become Venezuela’s problem in recent years with a hike of 50% in minimum wage 2 weeks ago as the country plunged into hyperinflation late in 2016 after their inflation rate rose from 100% to 500%, after their famous toilet paper shortage headlines back in 2015.
The Indian case bears no similarity to hyperinflation except that gold is more or less banned.
“In a recent notification, government has made it clear that any ownership of jewelry above 500 grams of gold per married woman will be put under the microscopic scrutiny of tax authorities.
Steep taxes and penalties will be imposed on those who cannot prove the source of their gold. In India’s Orwellian new-speak this means that because bullion has not been explicitly mentioned, its ownership will be deemed to be illegal. Courts will do what Modi wants. Huge bribes will have to be paid.”
Sounds similar to Argentina in 2012, when pure gold was banned.
“Banco Ciudad is the only bank left that trades the metal after Fernandez in July banned the purchase of certified 99.99 percent pure gold for savings. The bank sells it at 99.96 percent purity, according to Carlos Leiza, who oversees the lender’s gold trading.”
Why is all this important for us in 2017 ?
If the first month of 2017 is anything to go by, we can only expect the Year of the Fire Rooster (or Chicken Little) to be even more unpredictable than the Year of the Mischievous Fire Monkey (2016). Uncertainties abound in European elections for the 2 largest economies of Europe to be accompanied by Trump carrying all his unbelievable promises that we have logically ignored, could set the pace for nothing but crazy volatility going ahead.
And as Nomura puts it, “America First” means “Emerging Markets Last”.
There are 2 forces to combat this year, for emerging markets, most of whom are under capital controls – the Fed hiking cycle (stronger USD) and America First policies of trade protectionism and immigration rules.
Led by mothership China, where it is now almost impossible to wire money out, (even for expensive global real estate – Now We Know Why They Tend To Overpay For Everything) – we can only expect more to come after their gold quota last November.
Because while the regulator has long banned the use of foreign currency for real estate, its recent “call for additional documentation was seen as a signal that the government is serious about cracking down”.
It should come as no surprise after their warning on Bitcoin.
We are moving into a new era of sovereignty as America First policies start to hit the world and some global citizens pray for the same change in their own nations, change that could be coming or are in waiting while the rest are starting to see that their countries are not so bad after all, compared to what is happening in the US.
It will not be long until another EM flash crash because we have 3 overlying risks – China, America First and Inflation.
When we wrote about the Big Short at the end of November, it was a pretty easy call for USD to weaken against the rest of the world, as we observe Gold (+3.45%), Silver (+6.36%) and even the Mexican Peso (+1.28%).
While we can still expect Trump’s USD will not be the favourite currency of choice in the medium term still as central banks and funds work to diversify themselves and trade pacts get re-negotiated to dump the USD eventually, it is also not unreasonable to expect that America will be the economic star in the near term, with Japan’s Abe making an official visit with a “jobs and investment” package in hand.
Source : CNBC
Yes, inflation is coming to America along with immigration reforms, border taxes, rising wages and more, mostly at the expense of the emerging market, and that does not bode well for people out there dying or fighting for their money in the meantime, so it would not hurt to keep those US dollars handy.