USD , Gold & Sarah Palin

The media have been making a big fuss on the surge in gold price above $1,000 and on the demise of USD over the past few weeks. Just like my opinion of Sarah Palin, I just shrug my shoulders and ask "so...". Why are we acting as if these developments are a big shock to the system??? Its not, to the general investors, a weaker USD and a higher gold price are what's needed to bring the global economy to an equilibrium. Its only the papers, magazines, business dailies and business networks that have you thinking that these developments were highly surprising and "unanticipated". I guess these people have to sell papers and advertisements, hence they yell through their headlines: "Obama Comes Under Fire As Falling Dollar ...", " "Gold Prices Goes Off The Charts ...", etc...

There is nothing new. If anything, it shows that the global finance paradigm is realigning itself quite well. You cannot have such a huge credit and leveraged implosion in the US and parts of Europe without taking away some of the "wealth" from these countries. You cannot always ride on the fact that you are the reserve currency and everything will be business as usual.

Just look at the printing press at work in the US ever since Greenspan took over, these notes are not backed by anything but the nuclear warheads and flying bombers. Granted we need a superhero to safeguard democracy in the global platform, and its a price we all have to pay, but there comes a time when less and less will want to hold USD papers, and the day is now.

China and some Asian leaders have been warning that the US indebtedness cannot be allowed to go on unchecked. Now the US have been awaken to the fact that those are not hollow warnings at all. While I think the USD will still be the reserve currency, it is well on its way to losing a large part of its "premium".

Unbelievably, CLSA invited Sarah Palin to the big annual conference in HK. Gee... why listen to that woman who has not traveled out of Alaska or the US. What kind of value add commentary does she bring to the table? I am not even going to quote what she said about the USD weakness and gold price (she did say something) as ... seriously folks, I am being nice here, she is nowhere qualified to contribute with any sense or participate in this discussion. I'd be better off talking to my taxi driver who can give me a more nuanced view on these issues.

In fact, what is so bad about a weaker USD??? Most Americans don't really travel overseas anyway. They have almost outsourced everything they can to China, Brazil and India anyway - they don't really make anything anyway. A weaker USD will boost the competitiveness of US companies though and make their stocks a lot more attractive.

The weaker USD is basically a long overdue result of Fed's printing press. Its always the central banks that causes economic bubbles, not the consumers, not the banks... they only behave badly when given too many toys by central bankers.

The USD weakening is good for the majority, it shows that if you messed up your financials, you get punished. We need to push the USD down another 10% over the next 6 months so that we can force them to deal effectively with their indebtedness. You cannot just pump $1,000 bn over the last 12 months and pretend that all is fine.

Gold price is merely reflecting an inflationary hedge that many see is coming over the next year or two. Like it or not, higher gold prices actually is good for stock markets, because commodity prices will be higher as well as most assets. Its a reflationary cycle, much like pumping hot air into a balloon, all assets go up, including stocks. Yes, we are basically remaking a new bubble. Still early days though, maybe another 12 -24 months before we get pricked - key, watch the global interest rates movements.

We need higher gold prices because that means inflationary fears are rising. we need to have inflationary fears because that means that business activity is on the up and/or the reflationary cycle is up and running owing to the fact that the large amounts of liquidity being pumped in by central banks over the past 10 months are now being put to work (i.e. circulating in the system).

We all need a bit of inflation every now and then, you certainly don't want a deflationary or stagflation period (go ask Japan) ... a bit of inflationary fears now is good and needed.


p/s photos: Amigo Feng Yuan Zeng

The ONE PERCENT's Significance

In August consumer prices dropped 0.1% from the previous month. In September it was unchanged. The just released figure for October saw a 1% drop from September. This one percent month on month decline is very significant. Firstly, forget about inflation, we now have to seriously talk about deflation. We are only starting to see consumer prices feeling the effects of months of real estate price plunge and stock price decimation. A trend once established is hard to reverse. You people know how difficult prices take to come down. When it goes up, it goes up quickly.

When trade slows, when inventory builds up, consumer prices are very sticky in coming down. The fact that it did not just ease down is highly critical. One percent month on month decline has never been registered in the US, except during the Great Depression. Take a few seconds to reflect on that one percent now.

Proper tracking of consumer prices only started in 1947, and this one percent was the largest ever since tracking started. Deflation has many implications - the one percent decline shows how serious every sector is facing the crisis, it is felt in every sector basically. Consumers are delaying purchases in a deflationary environment. That's no good. The Fed is now setting its interest rate target at 1%, and there is a very good chance we could see zero interest rates before things turn around.

When I studied economics, zero inflation is not a good thing. It indicates that things are not moving, things are dying, industries will constrict, there will be cost cutting, there will be layoffs, there will be a great incentive to hoard and save.

The positive would be the one percent will cause the Fed to speed up spending policies. The Fed would be moved to lower rates faster than it need to. The Fed will have to pump liquidity into the system with more urgency.

Usually even in a downturn the consumer prices would be easing down month on month, not by the one percent we just saw. That indicates that the trend has just started and will see at least a few months of negative consumer prices month on month. That one percent will be enough to cause all commodities producers to drive down inventory, sell at all cost, even at losses, stop plants functioning, even if it means lowering capacity utilisation and incurring losses. 7,300 here we come. CPO prices, Rm1,200 here we come.

p/s photo: Grace Park