A View from the Trenches, December 9th, 2009: "Thinking with perspective"
To the risk of sounding like a broken record, let me repeat that back on September 2nd, I wrote that:
“…emerging markets are the Achilles’ tendon… We can perfectly
see a G-8 central bank coordinate assistance with another G-8 member,
but investors are wondering who is going to pay the bill, if a fiscal
problem unfolds in an emerging market. The IMF? Maybe, but given that
history suggests otherwise, the onus is on policy makers…” (www.sibileau.com/martin/2009/09/02 ).
And that on September 3rd, I suggested that:
“…A run against an emerging market’s currency would not
necessarily be supportive of the USD, if the same is triggered by a
wave of defaults affecting the country’s financial system. It could
potentially be supportive of gold, if the big guys (G-8 countries)
don’t lend a timely hand…” (www.sibileau.com/martin/2009/09/03 ).
Yesterday’s panic on the health of emerging markets should force us
to reconsider the problem at hand, at a higher level. Thus, let’s gain
some perspective here. Let’s not drown in a glass of water. Europe will
not risk its monetary union on the fiscal situation out of Greece or
Portugal. In fact, is this any surprise? Has it not been decades since
these, now so-called “peripheral” countries, have been running debt
sustainability problems? Certainly, downgrades affect investment flows
in the short term, but my view here is that it will only be temporal.
On the same note, does anyone doubt that institutions affected by the
Dubai restructuring will not have access to liquidity lines, if needed?
The 2009 story was all about injecting liquidity to avoid another
depression, and it worked. If it worked, there will be more of it in
2010, if needed.
The existing monetary policies were first proposed by Keynes, who wrote the following on the same:
“…when output has increased and prices have risen, the effect of
this on liquidity-preference will be to increase the quantity of money necessary to maintain a given rate of interest…” (General Theory, Chapter 13, Section III)
I am convinced that when this whole exercise in monetary policy is
over, we will need a much larger quantity of money to maintain
back-to-normal interest rates. How do we get there? Bernanke himself
reminds us of the road chosen every week: Maintaining rates at a low
level for an “extended period”. I see no reason to not take Ben’s word
at par here.
In conclusion, I will go on record here saying that when this
confusion triggered by concerns on the future of “peripherals” as well
as end-of-year technicals disappears, we will look upon these days as a
time of opportunity. When will the confusion bottom out and disappear?
I have no clue. It will vanish when it will vanish. Sometimes, it is
best to leave things as simple as that.
Lastly, should the world collectively coordinate a 2010 of low rates
to thwart prospective liquidations in emerging (and perhaps
not-so-emerging markets too), gold will underperform, if our Thesis
No.2 is not refuted.
Martin Sibileau
The comments expressed in this
website and daily letters are my own personal opinions only and do not
necessarily reflect the positions or opinions of my employer or its
affiliates. All comments are based upon my current knowledge and my own
personal experiences. You should conduct independent research to verify
the validity of any statements made in this website before basing any
decisions upon those statements. In addition, any views or opinions
expressed by visitors to this website are theirs and do not necessarily
reflect mine. My comments provide general information only. Neither the
information nor any opinion expressed constitutes a solicitation, an
offer or an invitation to make an offer, to buy or sell any securities
or other financial instrument or any derivative related to such
securities or instruments (e.g., options, futures, warrants, and
contracts for differences). My comments are not intended to provide
personal investment advice and they do not take into account the
specific investment objectives, financial situation and the particular
needs of any specific person.