Thursday, 8 October 2009

Warning signs of the financial quake

John Mangun
Outside the Box
Business Mirror

Can you remember back to the first week of June 1997? That week started and seemed ordinary by any standards. Yet before the next Monday had rolled around, the Asian crisis had exploded, plunging the value of the peso and pushing the economies of the region into chaos and recession.

There was little warning of the impending financial disaster for the ordinary person. Even the “experts” and we market watchers were taken by surprise at how quickly the whole thing developed and then exploded.

A similar event will soon happen but this time it will be like a flower blooming, steady and predictable but with the outcome inevitable and assured.

I wrote a couple of weeks ago about the gold/dollar tsunami that is going to hit the financial markets where we will see a collapse of the dollar and the price of gold skyrocketing.

Thirty days from now we will witness the “earthquake” that will trigger the tsunami. The signs are so obvious and are even occurring in the Philippine financial markets.

It is said that by watching the behavior of animals carefully and closely, one can “predict” an earthquake. Let me share with you some of the warning signs happening right now that are foreshadowing the earthquake that will lead to the tsunami.

The value of the dollar is going to fall and fall, and this will trigger great, near hyper-inflation in the US. The value of the dollar will fall so much that imported goods and imported oil that the US relies on will see prices skyrocket. That economy will fall into a greater recession with the nominal price of homes and other assets like stocks falling further as Americans scramble to raise cash for ordinary living expenses.

US interest rates will eventually have to be raised to offset the drop in the dollar, further strangling the US economy.

What are the signs that all this is going to happen?

The past couple of weeks have seen countless comments in the financial press about the other major nations in Asia and in Europe calling for a monetary alternative to the dollar, a “Super Sovereign Currency” (SSC). This past week saw more speculation that the oil exporters are pushing to have crude oil priced in euros and other currencies, and not in dollars. The Chinese government, for the first time, sold sovereign bonds to foreigners, denominated in Chinese yuan, not US dollars.

The Chinese, acting together with Japan as a major US creditor, and Russia, India, and Brazil (BRIC), have told the US that they can no longer tolerate the Obama administration policy of quantitative easing (QE). QE encompasses massive spending through massive budget deficits combined with the never-ending printing of dollars. The purpose of QE was to create the illusion of economic growth, or better known as the management of perspective economics. Make people think the economy is good and maybe a good economy will just happen. This policy has failed. The Chinese are fed up with financing this American illusion, and the only alternative is to devalue the dollar and force higher inflation on the Americans as they must suffer the consequences of the foolish policies for the last 20 years.

QE was supposed to have ended in June. But because the economy only became worse, it was extended until the end of October. That is why everything will come to a head in November as the Chinese and others pull the plug on the dying US dollar.

Gold has broken decisively above $1,000 as nations and institutions buy the metal to get rid of their dollars, and also knowing that gold will be a part of the SSC basket. Australia raised interest rates this week to make the Aussie dollar more attractive and to protect it against the falling US dollar. The Aussie dollar is now at a 14-month high against the greenback.

Here in the Philippines, suddenly, and by suddenly I mean a 180-degree change of forecast in two months, there is speculation that the peso will continue to appreciate. In September, the “experts” were saying that the peso might reach 50. Now the talk is 45 or better before year-end. The only way that can happen is with a massive depreciation of the dollar.

The local stock market is getting ready for a dollar depreciation/gold-price-boom scenario too. After having spent two-and-a-half months stalled between 2,800 and 2,900, the market exploded this week, most of the increase led by Philippine Long Distance Telephone Co. (PLDT). When you hear about the Philippine Stock Exchange (PSE) being up 50 points, that really means nothing. The reality is this.

The total value of PLDT shares increased by $500 million this week. That is real money. Some $20 million flowed into the stock market this week, the week after the worst flooding in decades. Sure, that makes sense. Or maybe, foreign money knows the dollar’s days are numbered and are fleeing into stock markets like the Philippines and Brazil and other emerging markets before the value of the dollar goes down dramatically.

Mark this: as of this writing the dollar index is 76.293, the spot gold price is $1040.88, the peso is 46.60 and the PSE index is 2,967.06. Three of these four will be significantly increased in value by the end of the year.

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