Friday, October 15, 2010

An inflection point is upon us

The phony war may be ending. I think everyone should have a little physical gold and silver handy, unless you live in a country with plenty of water, food, petroleum, medicines, and rare earth metals.... If you do, please let me know where it is, 'cause I wanna move there, or at least buy its currency.

As most of you know, the contradictions of capitalism are showing up in the FX market (foreign exchange, for all you literature majors). What's clear is that TPTB are rapidly losing control at the international level and it looks like the Washington Consensus is approaching crack-up. There is a debate about who is going to "win" -- Martin Wolf in the FT a few days ago thinks it's the USA, but retaliatation from elsewhere is also likely being prepared. The Chinese authorities are by turns trying to scare us with the risk of a major domestic upheaval in their country if the yuan revalues up too rapidly, while also trying to move tout de suite to arrange trade with direct settlements invoiced in local currencies.....

Meanwhile, clearly some in the capital markets are awake to "tail" events:

From the FT Alphaville site:

The rift between Japan and Korea which has spilt into the open in the past 24 hours, with a Japan minister protesting Korea’s currency policy, only to be rebuffed by the BoK governor, is significant for the rifts that are opening up WITHIN Asia.

c) Start taking more note of what is going outside of the ostensibly major players: i) Russia widens rouble intervention band – sells it as a step towards inflation targeting – but in truth they are fed up with constant non-RUB flow related interventions, and the instability of their $480 Bln FX reserves ii) Singapore tightens policy, but widens SGD intervention band for the first time since 9/11, eminently expecting more volatility and again probably fed up with intervening. iii) Taiwan regulator suggests foreign investors put up foreign currency as margin for Taiwan stock trades – are they fed up with intervening? I think so..

More observations as and when they come to light, but there seems little doubt that we are now heading down the cliff face of a full blown crisis, but smelling the coffee of that crisis is not yet en vogue!

The upcoming G20 meeting promises to be a hugely significant event, though we hoi polloi won't get the details until very late after marching orders have already been issued. This was supposed to be the meeting at which the composition of the SDR was to be re-negotiated, I believe, but I've heard nothing about that lately. Given the latest events, I expect volatility in global financial markets will accelerate immediately afterwards unless there is a grand, sustainable compromise announced in the final press conference. What are the odds of that?

Michael Hudson has a good comprehensive piece here, which is widely being linked to, and is the closest we are getting to a progressive view of these developments in realtime.

What was it that Frank Fukuyama said about the end of history? Maybe it really was all that dope he smoked as a high school kid.....

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