Recent financial turbulence stemming from a deteriorating Eurozone has me speculating how the financial landscape could look like should the Euro dissolve. View full article »
Category: III. A Peek into The Future
I like to speculate (don’t we all?) and come up with unique ideas on what the future may hold; a Peek into the Future you could say. I felt compelled to jot down some potential and intriguing medium to long-term trends taking hold regarding US government policy. But first, a quick recap. View full article »
There are reasons to believe that market action over the past 2 weeks will have a negative effect on consumer and business confidence. Reports are reflecting reduced spending trends by business leaders due to concern over the economic outlook. Serious potential hazards seem to be omnipresent, ranging from the Eurozone debt crisis to a China hard-landing to a double-dip recession in the US. The risk of a global downturn is rising by the day. Continued deterioration will most likely result in the Fed instituting yet another QE experiment. This article is meant to speculate on when the Fed may initiate QE3 and the program’s subsequent effects. View full article »
This is an excellent article on the possibility of China and the rest of the exporters taking “the road less traveled by”, sacrificing a few years of strong economic performance, and fix the global imbalances that we see today. If this in fact happened, how would this change the investment landscape? View full article »
You see millions of websites devoted to the topic. These would mostly be the self-proclaimed “Gold bugs” who warn us that an impending hyperinflationary event, which would significantly boost prices of all precious metals and necessities such as food, would lead to chaos as the country’s savings would vanish literally over the course of a couple of weeks. Riots would occur. Commodities would gain in value as Fiat currencies see their end game. Overall it portrays a very ugly picture indeed (let me pull out that Mayan Calendar). My definition of hyperinflation revolves around a deep and sharp loss of confidence in a currency. This is different than inflation where it is simply a function of too many dollars in the economic system; however, the line between high levels of inflation and hyperinflation is quite gray primarily dominated (in my view) by “future inflation expectations”. 
Quick upward movements in this metric would signal to me that the public is less confident in the purchasing power of their currency, a prerequisite to hyperinflation. Another reason that I’ve thought of, though not heard much about, would be a supply-side shock in important material resources. Regardless, I’ll come out and say upfront that there are so many headwinds, crosswinds, you name it, that predicting whether hyperinflation would occur would be akin to throwing darts. However, this will not stop me from researching the reasons why such an event may occur. View full article »
In order to sustain a growing economy during one of the worst global recessions in history, Chinese officials approved a massive stimulus package that dwarfed that of the US in terms of percent to GDP. This stimulus package was administered very effectively due to the government’s control of the banking system. Thus far, it has fulfilled its purpose and has produced envious GDP growth rates and worldwide acclaim. However, like any other program that tinkers with economic growth, unintended consequences have resulted. Inflation has begun to lurk and has produced a fork in the road for policy-makers. They have two main options: continue loose monetary policy and look the other way or combat inflation by raising rates and/or letting the yuan strengthen.
I believe that continuing loose monetary policy is not an option at all. Pursuing this would result in depletion of rural savings, as well as a higher cost of living for essential items such as food and energy. For a government that seeks to maintain control of its country at all costs, it would effectively be shooting itself in the foot. Continued increases in inflation would result in higher crime, more riots, and an overall destabilization of the Chinese government system. China’s rural population is so vast that any government would be hard-pressed to subdue it were it to get unruly.
The other option would be to combat inflation by letting the Yuan appreciate and/or raising rates. Letting the Yuan appreciate would increase domestic purchasing power (consumption), subdue inflation, and improve exports for foreign countries such as the US, Japan, and Europe. Unfortunately, China has just been named the largest exporter in the world. It is very unlikely that domestic consumption alone can carry this one trick pony. Yuan appreciation would create a substantial headwind for exporters, which at a time of weak global aggregate demand and thin exporters profit margins, could prove disastrous for the economy in general. The other option entails raising interest rates, but this has its own unintended consequences. Raising rates could pop a potential bubble in the real estate market or induce the incentive to save.
Ironically, it is now China that must decide between its upper and lower class. The US and Europe have made their decisions. They have committed taxpayer money to bail out imprudent decisions made by the financial and political elite. While this has led to considerable displeasure in those countries, there haven’t been any major violence demonstrations. I believe that the story for China would be completely different. Pursuing policies that may be construed to support the upper class would lead to immediate violence on a large scale and an unstable situation for the government. Their government may be in a checkmate situation. They must combat inflation. The world will soon find out whether the emperor is wearing any clothes.
We have gone though an unprecedented period of uncertainty and fear. Systems of belief have been under attack as this recession seems to have found their every flaw. A while back, my mind was blown when I read many pundits wondering aloud about Capitalism as a system and whether it was a failure. Further, the recent events with Greece now show a very large flaw in the system that binds the Eurozone.
So, what comes next? I believe we are starting to see the seeds of what will turn into a questioning of Democracy itself as a viable system. It sounds insane, but think about it for a second. The Democrats are fast losing support and many politicians are now worried about keeping their states happy. The fractures are now starting to become apparent. The Republicans are gaining favor. A worsening of this scenario will cause more and more deadlock over the passage of legislation. At a time like this, having political deadlock could be a very big problem as the country would simply be letting the cancer grow. Only until the country is in dire straights would they unite as they did when the world almost fell apart in late 2008.
I believe that our country has so many intricate parts ranging from foreign policy, to supporting a climate treaty. We have economic policy. We have an ethics system (abortion etc.). In all these very profound parts that exist in our nation, there is no way that only 2 political parties can provide the voting public with the best combination of policies. It’s either one thing, or it’s the other. We need more representation of the other aspects of our nation in order to provide the public with enough options to pick the policy they think is best. Think of it as having a 401K. A plan that only offers two choices A or B (= 2 political parties) is really not doing you justice in “diversifying” your investments for the future. Neither does our political system.
China and Russia
Turkey’s Role
Current News
This should be making many people nervous. If a conflict arises in this region, one that has many big players behind it, one that could include a nuclear option, then the recovery will most likely be lost as oil rises.
Some things have changed, but the jist remains the same.
Current News:
Interesting development here. China is shifting policy from one of growth to that of inflation control due to increasing rates of growth and underlying inflation concerns. This means a paring of stimulus leading to lower lending and an overall tightening of policy.
A popular bearish thesis (including mine) is that rising stock markets and commodity markets have been a result of a tsunami of liquidity and lower interest rates leading to weakening currencies (China and US).
Asian markets sold on the fantastic GDP number on concerns of a shift in policy, further adding to the liquidity induced stock market rally thesis. This could be once again an example also on how gov’t action has dictated market moves in the past.
Expanding on my thesis, I believe that China’s domestic economy cannot pick up the slack that has developed in the export sector despite its large growth over the past couple years. Unless the US consumer (the global end consumer for the last couple of decades) begins to show strong signs of life, global trade flows will not be anywhere near 2007 levels. Eventually we will hear reports of falling production as the export glut continues.
As you can see, while US markets have been rising, the real economy’s positive reaction has been quite muted. Joblessness continues and consumption remains sluggish (though it has been improving a little). Jobs are the lifeblood of any economy. As long as we continue losing jobs instead of creating them, the recovery will be in jeopardy. Given that Americans are very much in debt, consumption would be expected to stay low. A weakening dollar does nothing except increase costs for raw goods. Wages will not grow as labor supply remains very high. Credit is contracting. I just do not see the spark that will lead to higher consumption and thus expansion of the labor force and capital expenditure (mind you we have very low capacity utilization already).
A very simple and idyllic analogy to this whole problem is trying to light a fire with wet wood. You can throw gasoline (stimulus) on the wood and light it up. The flame will be spectacular, but will begin to die down as the gasoline is used up; throw more gasoline, once again the dimmed fire lights up strongly, but again will die down until once again the fire is out. In order to light a fire, you need dry wood, this dry wood equates to a healthy global economic structure. I do not believe we are there yet.
A more cliche analogy is that of taking care of a hangover by boozing all over again, what happens when that high is over (see pic)? Poor guy.
