Baseball91's Weblog

July 8, 2009

Milwaukee Bucks II

Filed under: currency,euro,European Union,Japan,TARP — baseball91 @ 1:18 AM

“With stocks tied to bonds, bonds tied to housing, housing tied to the credit crisis, and everyone hitched to the government, this was all like the conga line to the poor house.” -Craig Rappaport, wealth manager at Janney Montgomery Scott

Todd Harrison writes: In a free-market system –such as we used to have –inefficiencies would be naturally resolved by supply and demand. In the current world, a “man made” readjustment, such as a meaningful currency move that significantly devalues the U.S. dollar becomes increasingly likely.

Todd Harrison wrote in January: “Our current course has ominous ramifications for the dollar. As the greenback is the world reserve currency, those implications extend throughout the global landscape. A currency holds a nation together and the economy — perhaps society at large — assumes more, not less, risk as a function of the path of our attempted fix.

“Structural: As the equilibrium between asset classes remains elusive, the single greatest risk remains a seismic shift in currency markets. Therein lay perhaps the most profound path of maximum frustration, one that punishes the savers who proactively prepared for the current crisis. While negative sentiment creates fertile ground for bear-market rallies, aggregate risk appetites contract and voluntary and involuntary thrift collide. This continues to manifest despite efforts by government officials to induce borrowing rather than allowing for the painful, yet necessary, debt destruction required for a more stable economic foundation. Social mood and risk appetites will determine our financial fate and, by extension, the way we live our lives. That proved positive during the era of conspicuous consumption but is troublesome as we edge through the age of austerity.”

Writes Todd Harrison, reviewing his January thoughts: “The age of austerity has officially arrived and we’ll see a steady stream of social strife as the rejection of wealth increases in size and scope. While societal acrimony began to percolate last year, this dynamic will manifest through social unrest and geopolitical conflict as we edge ahead.

”This is, without question, the single biggest socioeconomic risk as we stand at a critical crossroads. On the one side, there is orderly debt destruction that will ultimately pave the way for true globalization. On the other, there is isolationism and protectionism as sovereign nations protect their interests at any cost. If calmer heads don’t prevail and the global community takes a turn for the worse, history books will likely point to Shock & Awe as the beginning of WW III. You don’t have to agree with this assessment; you simply have to respect it.”

“With saber rattling on the currency front (not to mention the general direction of stateside social mood) is proof positive that this unfortunate theme seems to be playing out.

“There is a palpable likelihood that the global balance of powers will fragment into 4 primary regions: North America, Europe, Asia and the Middle East, with ramifications which would manifest through social unrest and geopolitical conflict,” writes Todd Harrison at

Writes Todd Harrison, the seeds of discontent have been sowing under the surface for years, with the greenback off 30% since 2002. It is his view that the stealth recovery actually began at the turn of the century, with the March 2000 top for the NASDQ. And we then are halfway towards what he calls a stealth recovery one way (globalization via debt destruction) or the other (isolationism and global friction).

Todd Harrison now writes about the dollar: “If drugs continue to be injected which mask symptoms rather than address the disease (medicine in the form of debt destruction), the likelihood of a seismic readjustment increases in kind.

“As governments take on more risk—as they price assets on behalf of the market and transfer debt from private to public—the common denominator, or release valve, becomes the currency.”

Asset classes will, as a whole, deflate, and my economic condition measured in greenback will appreciate. And so will my taxes. To pay for it all.

With quantitative easing came a concern for flight of capital from the U.S.

A position paper was written by the Federal Reserve a few years back, discussing the option of a two-tiered currency, one for U.S. citizens and one for foreigners.

Harrison’s January thought was: “The unfortunate aspect of our current conundrum is that in many ways, the cancer is bigger than the patient. It is analogous to a financial dike springing holes faster than the government can invent fingers.”

Joining the growing chorus questioning the U.S. dollar’s unofficial position as global reserve currency, in India, chairman of the Prime Minister’s Economic Advisory Council, Suresh Tendulkar, is urging India to diversify its foreign-exchange reserves and hold fewer dollars, according to Bloomberg News.

Zeng Peiyan, the head of China Center for International Economic Exchanges and the former Chinese Vice-Premier, in a speech in Beijing on Friday called for a new system to ensure the stability of the major reserve currencies, the China Daily reported.

Tensions mounting between the People’s Bank of China’s economic concerns over China’s holdings of dollars, with the earlier call by central bank chief Zhou Xiaochuan for the development of a new super-sovereign currency largely taking the place of the dollar, and the Chinese government, with their “diplomatic reasons” for toning down their criticism, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange. The Chinese government is still more happy to play to the tune of the Bernanke-Geithner camp which sees leaning against the wind in order to protect the U.S. dollar as a necessary evil,” Gallo said.

Writes Todd Harrison: “There is clearly risk to that region but we must remember they have a 25-year head start down Deflationary Road. Japan has the highest level of savings relative to private debt. Their public debt is horrendous but what is happening over time—and why the Yen is appreciating—is that Japanese savers are bringing those savings back to Japan.

He notes that thee Nikkei entered the 2009 half-time up 13% vs. a 3% loss in the DJIA and a 2% gain in the S&P.

“You can’t spend relative performance, we know, but I expect Japan to out-perform U.S. equities this coming year.”


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