The World Currency War begins
The world currency war. I like how that sounds. Are there any nations that still use hard currency? If so, I've got them in the office pool.
In my experience, many Fiats fighting can equal one classic Yugo and nobody needs that in their driveway.
Yesterday's fiery speech by Guido Mantega, the Brazilian Finance Minister to a forum of industrial leaders , addressed an important issue in world finance which is rapidly playing out before our eyes.
From my vantage point, I am completely against this senseless currency war. In fact, I shall quite possibly eat a cucumber sandwich on the White House lawn and sport my organic sandals over it!
10 years ago I would spend a month on the beaches of Rio, partying it up, stuffing myself with delicacies and gorging on beautiful women, simply by virtue of my moderate stack of greenbacks. Today I have to grease one maitre'd after the next. It's as if Copacabana has become Park Avenue, over night.
Just in between my last two visits, my frivolous consumption has decreased by 15-20% and it's not that I'm slowing down, it's the Brazilian Real that has gotten too fast.
None of this comes as a surprise to any of my Bearish brethren. Brazil is a filthy rich country from the commodity perspective and was bound to rise to prominence in the "Kingdumb of Fiat".
Not shockingly, a nascent market player like Brazil is unprepared for the responsibility and pressure that comes with the cruel and unusual tactics of guerilla currency warfare.
Where countries like the U.S, Japan and China can greatly benefit from devaluing their respective currencies, it hurts a true producer nation like Brazil in two major ways:
1) It pumps their currency up. The Brazilian Real is currently the world's most overvalued currency, having reached a 10-month high vs. The U.S. Dollar. Those who remember Brazil 10 years ago are head scratching in unison.
2) It poses the imminent threat of a commodity bubble. Considering how much the world counts on Brazil's resources, the fallout potential is scarier than many of the market issues we worry about daily.
For those of you who have been paying attention to the Venezuelan elections and the recent ridiculous spikes in commodity prices, you are very well aware that the Bovespa is a place Wall Street is becoming further and further vested in every single day.
The issue of currency manipulation is something we generally think of as a "U.S-China" issue. Many smaller players are throwing their hats into this ring of fire, however, and as we don't seem to want to accept (in the face of overwhelming evidence), the world can get bloody in a hurry when the sheep follow the wolves.
Yet another similarity between this recession and the great depression. Only this time around, countries are debasing their currencies instead of raising tariffs.
As for the commodity complex, aren't most of the commodity currencies (AUS, NZD, CAD) also reaching highs against the $?
Don't get too far ahead of yourself, the tariffs are coming (in some form or other).
Don't be shocked if you start hearing embargo talk in regards to China.
As far as the commodity complex, you're right on. I'd listen to old man Rogers and get your Agronomy degree while there's still time. Mean reversion can be quite a disturbing phenomenon in the evolutionary sense.
Midas,
This was expected. The moment someone other than the Fed or the ECB steps in to manipulate their currency, they will get burned. Look at the SNB and the BOJ as prime examples. Then again, the Fed has been actively manipulating curency through their shadow monetization, that is using the discount window to fund banks who make riskless profits by buying from the Treasury and selling USTs and MBS back to the Fed. Thank god for SOMA limits of 35% of the total issue of any given CUSIP otherwise this influx of "liquidity" might be even more apparent to the already ignorant masses. This is actually a scary thing to consider, though, as the Fed has the ability to monetize however much they want to provided it stays within the SOMA guidelines. What's worse is that lending has come to a halt because bank realize they can make more on this riskless tade by lending to the Fed instead of leanding to main street.
Now that all of the major players are in, we have heard news that Peru and Brazil are both entering this game, and I don't doubt that this wil these will be the last countries to get involved. You're spot on with commodities, although this will also hurt all trade across the board and ignite potential trade wars. We will see the commodities bubble pop because of this, and it will hurt. It really is a race to the bottom, as whoever can debase their currency the fastest will cause the most damage. And this won't lead to just embargos, I expect to see a full on series of trade wars emerging.
My problem with all of this is that we have an unusually high correlation betwen treasuries and the US Equity market, a tightening of UST spreads while the S&P is maintaining its current level and gold reaching all time highs. Couple this with the value of commodities increasing, led part in parcel by gold, and we're seeing the biggest inidication of long-term disarray to come. In the short term, we can only sustain this imbalance for so long before we see a really nasty reversion to the mean in all markets. When things hit the fan, they will go out like a bang and not with a whimper.
Have you made your peace with the markets yet? I know I have.
Nice job, Frieds. Not much I can add to that analytically. That having been said, you can never be sure of what will happen simply due to the Ostrich Syndrome. For every person that gets it, there's the guy urging the passengers/crew of the Titanic: "remain calm, all is well" .
The problem with a severe commodity bubble is that commodities do actually exist in the physical realm. A severe commodity bubble burst can lead to actual natural resources that we cannot survive without not being produced, or even worse...getting thrown out, burned, left to rot, hoarded and sold on the black market.
I'm not that worried, but that is more a reflection of my acceptance of military might as a pillar of market microstructure over actual fiscal policy. Only the Fed could get away with what they're doing and only in America.
Ironic, isn't it?
so frieds, where should I put my money to get a decent return? you agree with midas that I shoudl buy farmland?
Patrick,
Arable farmland is a good investment outright. You can benefit from agribusiness, tax credits and the ability, depending on where you buy the land, to be self sufficient, well, that is unless you live in New Jersey. All you need for that is 10 Acres and meet the threshold requirements of selling food/firewood/lavender (yup, lavender. If you don't believe me, look up Ellen Kartcher, and her Christmas Tree Scandal to see what abusing owning farmland can do to a political career). Only in New Jersey will you see that happen regularly. If you can't buy a nice plot of farmland somewhere in the middle of the US (or on the Eastern Slope of the Rockies), might I suggest large tracts of land in Canada in the hopes of using the land for mining. Between usage fees and the potential to benefit from owning land with usable resources on it, you could settle into having a nice secure investment.
I am also a fan of getting a decent return out of true capital improvements. Invest a little money and learn the basics of a trade skill. That will serve you better than almost anything I can think of, as you will find yourself with the ability to do more. I was always helping my dad around the house, so I spent my time learning the basics of electrical work, carpentry and plumbing and have spent time and effort to learn more just to be self sufficient. Plus it doesn't hurt to have a few skills you can use to barter with or make some money on the side. Plus, if you plan to invest in arable farmland, it's not a bad idea to have a few basic skills if you ever decide to move onto the property yourself.
Midas,
Thanks. I appreciate that. The problem about educating the masses is that you have both sides of the coin preaching the same thing, be it David Tepper and well known Fed Front Runner Bill Gross who say to firmly "Buy The Fed" or John Paulson who is preaching about equity market love, and the mainstream media who refuses to break from the status quo. The problem with the media is that any time someone goes onto CNBC/Fox Business/MSNBC and talks the markets, unless they spout the party line, they don't get invited back.
I disagree with you about the lack of production in a commodities bubble crash. Production will continue, but it's going to be hoarded by the producers, who will get whatever they want for the more necessary commodities. The more value it holds to our society, the more weight we will place on having it, particularly those tech junkies who can't help but live without the newest Apple device or the latest and greatest piece of Computer/AV Equipment. I think that we will see trade wars because of our reliance on certain commodities and the weakened US dollar will not help in the least bit. I can't help but think of Edmundo who said it best that being a minimalist is a far better approach to life than owning lots of physical property. The less frivolity you need, the more you can do without.
And yes, only in America can the Fed do this without getting in trouble. This is why we won't audit the damned institution and unless we stop buying into our corporate overloads, we won't be able to save anything.
As an aside to this, I highly recommend anyone who can check out The Inside Job when it comes out. It's an extremely interesting film that should be required viewing by everyone in the financial field. Although I don't necessarily agree with the film's perspective, it is still enlightening. I also recommend "The Soprano State", a documentary about New Jersey politics to see what I've mentioned in passing in a few of my posts. The nature of corruption in New Jersey is really a looking glass into part of the problem we face both fiscally and economically. I read the book (I have 2 copies actually, one of which is signed by the co-authors Sandy McClure, and the Third Jersey Guy, Bob Ingle, as well as Craig Carton (of The Boomer and Craig show on WFAN) and Ray Rossi, and one which I have no qualms in lending out to people interested in reading) and was floored by how much you hear about that could only be a movie, but is true. Definitely a good read (and hopefully a good film) to compare Washington to. Business as usual is never Business as usual.
Frieds,
You killed on this last one, man. Right on. You sir posses the sort of lucid, detached rationale that can only come from being raised in a sloppy joystick like Joyzee. Take solace in being the sane man in the nuthouse...or by society's standards...a freak!
Arable farmland has been a target of some hedge funds in the past. I am sure you can find an article or two in past Bloombergs on some hedgefund heading to Russia and buying up available land which is not being utilized. After all you can't really eat gold no matter how high it will climb.
Educating the masses is not possible because in fact most people are not educated. We train great technicians but people who are not enlightened. Ask most doctors about politics or physics or finance? Ask an investment professional about European history? Sure you will find some people who are well rounded, but that tends to be an exception. We are extremely specialized to be efficient at division of labor but that in turn expects that the rest of the systems are functioning properly (i.e. Congress) They are not and no one knows where to go from here really.
The sentiment on China is largely accurate, however, no one is likely to step to them at this point. In fact even Japan bowed out under pressure from business. This is the greater weakness of capitalism as Marx pointed out in his famous quote that the capitalist would sell you the rope you'd hang him with. The reality is sometimes you need to do what is unprofitable to contain what threattens your viability over the long haul. Then again education and political unity/stability is necessary for that. The west lacks this now.
In respect of "producer country", China is much larger than Brazil. Actually I believe US and Japan are both much larger than Brazil. If you are talking about commodity export, however, it's another story.
To Wallstreetoasis.com:
Land is always the most precious commodity, IMO better than gold or anything else. The question is nowadays it's hard to find a safe spot to buy a chunk of land.
Yeah right. My land is perfectly safe because I buy only Lunar Real Estate. You guys have fun when the nukes go off. I'll have a good view of it all.
www.lunarembassy.com
www.lunarregistry.com
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