OUTSIDE THE BOX
The year is starting out to be most bizarre.
Ten of thousands of birds have fallen out of the sky, dead before they hit the ground, in places from the US to Sweden. In fact, the first widely covered incident occurred just before New Year’s Day began in the southern part of the US. Thousands of dead fish have been washing up on beaches around the world from New Zealand to Brazil.
However, the strangest event so far in 2011 may be the recent employment/unemployment numbers in the US.
According the US government, 103,000 new jobs were created in December. While that was below the experts’ prediction of around 200,000, at least 100,000 people found jobs. But where it gets weird is that the number of people now on unemployment dropped by some 500,000. If only 100,000 jobs were created, then theoretically unemployment should have dropped by an equal amount. In other words, 400,000 people just disappeared from the job market.
Well, they didn’t actually disappear; they just quit looking for a job.
The local stock market has been battered since January 1, now down over 2 percent as of yesterday’s close. That is not unexpected given the price movement of gold, commodities and the dollar.
What we are seeing is a realignment of assets as the markets prepare for 2011.
The primary reason for the appreciation of the dollar over the last week is that Europe is about to unload a mountain of debt on the world. Greece is selling $1.94 billion in debt today, while Portugal is hitting the market for $1.73 billion tomorrow. Spain and Italy will come begging for new funds on Thursday. As a result, the euro has fallen from 1.34 to 1.29 (down over 4 percent) since the first of the month. The shift to dollars is the result of the market knowing that there is going to be a huge amount of new euros flooding the market. That spells inflation. Frankly, it does not get much worse than that.
It really is not much better in the US. This is a case of trying to figure out which economy is in the worse shape: the US or the European Union.
The overall picture for 2011 has not changed in the last two weeks. However, a dimension to economic growth that we mentioned last year is starting to take shape.
We know that inflation is an economy killer. It does not matter how much economic output grows up if inflation destroyed purchasing power. It does not do any good to get a 50-percent salary increase if prices went up 60 percent.
But this is what has changed on the global economic front in the last month.
Europe had taken the policy attitude through 2009 and 2010 that they would reduce spending and keep the money printing as tight as possible. The US has no intentions of reducing spending and intends to keep the presses printing money at full speed.
As a result of US policy, nations have been talking about a currency and trade war. As recently as yesterday, Brazil’s finance minister said, “This is a currency war that is turning into a trade war.”
Let’s face it. Wars are won by the guy with the biggest army and the biggest guns. And no one, not the Europeans, not the Chinese, not any country whose economy is tied to US can win a trade/currency war against Uncle Sam.
The Europeans have quietly surrendered to US economic policy and soon Brazil and the others will fall into line.
The Chinese are no different. Remember the renminbi is fixed to the dollar. You know that if you have traveled to Hong Kong. A strong peso against the dollar means a strong peso against the Hong Kong dollar and vice-versa.
This is what is going to happen.
Economic-growth numbers from the US are going to get stronger quarter by quarter. I know this seems like a change in my opinion but wait for a moment. With all the major economies now deciding to inflate their economies through money printing, the numbers are going higher, much higher. Real wealth creation will be near zero as inflation will take it away. But the numbers will look good and stock-market prices and, maybe even at some point, real estate will rise. All dollar-denominated prices will go up over the next year.
Global debt will not be an issue because there will now be an abundance of new money to repay the debt. Yes, it is like Monopoly money but as long as everyone has a big stack, no one will complain.
This early, trading with a rising dollar was rejoicing by the US New York Banksters that the war is over and the US has won.
What about real-growth economies like the Philippines?
Quantitative Easing or unrestrained money printing is like being hooked on drugs or like being an alcoholic. It is much more fun if all your friends and neighbors joined in. Also, if everybody is doing it, then it can’t be wrong. The US wants every nation to join the party.
Even if you were not a part of that scene, still, looking in from the outside, you think, “Maybe it is OK, and I should get in on the fun.” While we in the Philippines are trying to stay financially ‘sober,” the peso and the PSE have depreciated thinking maybe we should join the party. But we will not.
The government’s move to issue debt denominated in pesos is absolutely brilliant. It frees us from the dollar, like going to Baguio the weekend your neighbors are having a wild party. Further, we must raise the value of the peso through this year to counter the coming effects of global inflation. We are sitting on a mountain of US dollars that we will not have to use to repay new government debt. Those dollars will be used to fight inflation.
Hold strong. The best is yet to come for the Philippines.
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Tuesday, 11 January 2011