Run for the Hills?

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Posted by Esperanza from ( on Tuesday, February 18, 2003 at 0:03AM :

Run for the Hills?
Adam Porter, February 12, 2003

Before Christmas we talked about the general state of economics. Despite being told repeatedly of the green shoots of recovery it appears the general YearZero/GNN model is the one you should look for when finance planning. Like we say running for the hills is not the preferred option, yet. But route planning for the hills may be a wise move.

One of the items we talked about was currency deflation. No one else was talking about it except us. So let us say it again. The major economies of the world want to create their own personal recoveries. That is national not global. They want to do this by using exports. So they want to make their exports cheap. With borrowing rates for industry so low another way to stimulate exports is to let currencies devalue. If your currency devalues by 10% it makes your exports 10% cheaper to a buyer from abroad whose currency has remained stable. We have all heard of `race to the bottom` corporations, this is race to the bottom currencies.

There is one major problem in this outlook. Everyone wants to do it. Japan’s deputy finance minister Zembei Mizoguchi has promised “massive sales” of the Yen (Bloomberg 03/02/03) by the Japanese government. At the same time the dollar has been allowed to fall since November under new Treasury Secretary John Snow. Now Snow is saying that he “supports a strong dollar” (various 28/01/03) whilst at the same time presiding over a fall in the dollar to Yen, Euro and Sterling rates. Terry Smith chief executive of Collins Stewert Asset Management in London says “every major currency wants to fall, that is what the (big increase in the) gold price is telling us.” (Observer 02/02/03)

So, let us see. The US economy is going to win any major devaluation. It is like a deal in poker when all the players are holding high hands. They are all holding full houses and up. The UK is a powerful currency for such a small island. The Japanese currency comes from the world’s second biggest national economy. The Euro is a brand new congregation of many nation states including the third and fifth biggest economies in the world, Germany and France. And then there is America, “the sword of Damocles” according to Tony Dye, once of UBS Warburg.

But one can’t out-devalue the United States, they have too many reserves, too much international power. If they want to export everything to the rest of us we can’t stop them. Of course by deflating their own currency they are also running risks. Currency deflation leads to price inflation. It `kick starts` price increases or what used to be the terrible bugbear, inflation. At the same time the administration of GW Bush is proposing giant inflationary pushes on the US economy. Firstly the budget deficit is set to rise to record dollar terms in 2003 and then record real levels in 2004, if one is to believe the US Treasury’s own forecast.

So government is performing a rather `socialist` initiative to boost the economy, by passing taxpayer monies to industry to boost output, hold credit ratings low and so on. Except the government does not own any of the industries it is passing money to. Instead the military, oil and farming industry are set to receive giant handouts from Joe Schmo USA. Defence spending will reach $45m an hour in 2003 (source BBC 03/02/03).

Unfortunately, rather than save the US economy this appears to be a short term measure. A measure to prop up credit and borrowing (and maintain profits) for the top 2% of US society by falsely inflating the economy. At the same time the pressure is still downward. Certain companies may have increased revenue, like Exxon for example (source Bloomberg 03/02/03) but at the same time “We still need more top-line growth,” said Erick Maronak of Newbridge Partners LLC, New York. “You really can't downsize your way to prosperity.” In other words revenue growth and short term profit are being derived from sackings and other cost cuts. Those sackings will in turn dent `the consumer’s` ability to keep the US economy going some six to nine months down the line, as they cut spending and so forth.

This is all current economic thinking down to a tee. Rather than any idea of social responsibility the market makers are recreating the scenarios, and planning thereof, in the exact same way that President Reagan did in the 1980s and President Bush Snr in 1990s. Big budget deficits, massive military spend, subsidy to major industry, breaking of international agreements on tariff sets and so on. The reaction then to Gulf War1 was a recession in 1992-94, the knock on effects on the `Asian Tiger` economies and further consolidation of international finance and power in a smaller number of hands.

Many TV economists are repeating the mantra of `uncertainty` as regards the possible war in Iraq in 2003. Uncertainty in that the markets don’t know where to place their bets. Will there be a short oil price spike or a longer one? A glut of oil (as OPEC announced on 02/02/03) or a shortage? The basic premise being that a short war where Iraq’s military just gives up is the best option. Uncertainty will disappear, the oil fields will flow, cheap energy will be created (no matter who the profits go to), business will thrive, markets will be pleased. Bingo.

But through the 1990s one had `uncertainty` about Iraq. The no-fly zones and similar bore witness to the biggest bull market ever seen. No one was bothered by Iraq’s possible WMDs or Al-Queda during the dot-con era. Not in pure market terms. Missiles during impeachment sure, but nothing, like, serious. Rather the dot-con era papered over race-to-the-bottom economics. Even after a short war (and one assumes the pentagon desires this by the leaks on their “shock and awe” tactics) the uncertainties about `profit`, with or without inflation, will continue.

Where is the next set of `profits` to come from when most businesses are still paying off debts? Where giant telcoms firms have saddled themselves with huge interest payments on 3G services. Let alone the questions surrounding the long term availability of oil as a primary fuel source. Is there that much top line profit to be made from Iraq2: Shock & Awe? Certainly the US military did not want to stick around in large numbers in Afghanistan, pipelines or none. Instead their policies deflated into protect-Kabul-and-pay-nothing situ as have the rest of the international community.

Maybe there are people who can answer this. Hugh Hendry of Odey Asset Management thinks we could be in for “the greatest bear (falling) market ever.” One lasting anything up to two decades. In that scenario US policy makes more sense. Keep the oil cheap, run the deficit high, let the dollar fall. Bail out the US economy with giant subsidy from the US taxpayer to the major elite industries, arms and oil. Maybe through the odd war here and there. Let the dollar devalue, (as Soros predicted: BBC July 2002) over the next few years. Another dose of classic Austrian monetarism or Im-alright-Jackism, depending on phrasing.

It will be dog eat dog par excellence. On a grand scale. To stop the US economy nose diving into the floor someone else will have to pay. Who it is? Well, that is not yet clear. It could be a lot of people. My personal guess, and it is nothing more, is Japan. Europe is too powerful, it buys too many things from the US. The Japanese economy however is the greatest work of fiction since, well, I was going to say Tolstoy but now I guess it’s Enron. It has been on the wane for several years, it will be milked, its assets moved back to Japan and it will slowly fade to a being no more than a tool for the dollar in the coming battle with China. A kind of Asian Sterling. Strong enough but totally dependent.

But my stupid conjecture about who might get it in the neck amounts to nothing. If the US continues to aim its economy in the same direction as the last twenty five years, aggressive and monetarist, we are going to see fallout now that the giant bull market breathes its last. Fallout will happen somewhere. Usually the weak suffer the most, weak nations, weak areas, weak people within strong nations. It will come through people’s doors and threaten their families, destabilise and confound people’s ambitions, groups, nations even. It will become a more powerful, more concentrated, more dangerous tool in even fewer hands. 9-11, chemical weapons and social dysfunction mean nothing in the face of the market, the actuality of modern politics. Racing nowhere, as ever.

GNN/YearZero Investment tips:

Hold: gold, arms, oil & cigarette equities, major works of art/valuables.

Sell: That old comic collection, trivial stuff that no one will want when it gets tight, maybe Grandma? And of course sell debt. Get rid of it. And Government treasuries.

Gamble on: Swiss Franc rise over next three months, Yen to fall. Horses, but study form. Arsenal to win the Premiership doubled with Real Madrid in La Liga in Spain.

Don’t gamble on: Shares (exceptions above). Hedge funds.

-- Esperanza
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