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MARKET INSIGHT REPORT The West Is Old, the East Is Young By John R Taylor, Jr. Chief Investment Officer
Actually, the East is older than the West. While Europe was in the Dark Ages before the Renaissance, China and India were bustling societies, far advanced intellectually and scientifically than the West. However, starting around 1500 the Europeans caught up and eventually far surpassed the East. By the end of the 19th century, Europe and its North American offspring had conquered, intellectually overwhelmed, and economically dominated the East. But history runs in cycles. From the top, there is nowhere to go but down. Eventually the reversal always occurs, and the past few years are giving us the sense that this change in positions began several decades ago. Now the news is all about around us, and it seems to describe an acceleration of the process.
This doesnt mean the East will just power ahead, as dramatic growth and change brings wars and confrontation, which doesnt occur with the slow slide into irrelevance. The pictures of the Vietnamese and Chinese ships jockeying and bumping each other in the South China Sea this week and articles on the Japanese moving troops to Amami- oshima Island about 150 kilometers from the very disputed Senkaku Islands, makes it clear that more confident and growing countries are feeling their oats. Unnerving though it might be, military spending is part of the modernization process generating scientific advances, new consumer products, and wealth. The European states are following the mirror opposite path, cutting their military and lessening their ability to project their influence outside of their own borders. The most recent example of this enervating process is the situation in Crimea and the Ukraine where the Western states were unable to impact the situation in any way as the Russians re-took Crimea notwithstanding the vehement objections of NATO, the EU, and the United States. The process of absorbing Crimea was not in the least bit slowed and Western help was totally worthless for those who wished Crimea to remain within the Ukraine. Even the Wests offer to finance Ukraine is likely to prove feckless as the West does not have the many billions necessary to allow the country to survive and grow, and the major beneficiary of the funds that are being squeezed from the IMF and the impoverished EU will be Russia, not Ukraine.
On Wednesday, Russia signed a deal to supply natural gas to China for the next 30 years. The volumes and the construction around this project are enormous and will change the shape of Eurasia, slanting it to the East. Germany and the EU will be playing second fiddle to the Chinese. This might or might not be the best thing the Chinese and the Russians could have done, but it has taken the first move advantage away from Europe. We are not among the optimists about the long-term prospects for the Chinese miracle as we see many of the Communist problems that crippled the USSR as unsolved in China, but this is only a minor bump in the road to the Easts domination of the West. The economic value of this transaction will prove more lasting than the political relationship. Whether the East is Red is less important than the East is economically vibrant. We would be remiss if we did not mention the fact that the West is rapidly selling all its gold to the East. At the rate this transfer has taken in the past two years, in another 10 the East will have virtually all the gold. Before that happens the price will go way up and the East will be the victors again. Of course, the West thinks that gold is a barbarous relic, so we dont care at all FX CONCEPTS FX CONCEPTS GLOBAL MACRO RESEARCH GLOBAL MACRO RESEARCH CURRENCIES INTEREST RATES EQUITIES COMMODITIES To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com
CURRENCY Asia Long-Term View
Pride, Inflexibility, or Perseverance By John R. Taylor, Jr.
One of the advantages in managing foreign exchange is that with very complex information flows and no effective models, we must trade often to minimize our risk of loss. We learn a lot about ourselves. Anyone interested in avoiding a major mistake has to understand his or her persona and how it reacts to uncertainty, change, and loss. Central bankers and other financial bureaucrats cannot be so flexible and do not receive instant (often financial) rewards for being correct. Because of this government authorities are often out of touch with what is going on in the markets and the economy they are meant to be watching. Decisions to stay put or to change are always hard to reach, but if there are few decisions rather than many the risks of each one is magnified, especially as the size makes each more public. The resultant hesitancy to change clogs the decision-making process. Is it perseverance, a well-respected character trait; inflexibility, a trait often associated with ignorance; or pride, the one that brings all to their knees in Shakespearian or Greek tragedies, that slows the process?
The reaction function of money managers is many times quicker, so they are often the ones that lead the market in a new direction. Among governments, there are different personalities, too. The Fed is the most skittish, the ones who are most in touch with the changes in moods and data that impact prices. The ECB is slow to react, often moving too little and too late compared to what their reaction function should be. But when one considers that fact that there are 18 countries sitting around the ECBs table plus the six direct employees of the bank, it is a wonder they ever move on time. The worst of the G-10 government managers are the Japanese, as they seem to close their eyes to reality, leading us to see them as very proud and inflexible. Although we know they are intelligent individuals, as a group they act in a fashion that often shows ignorance of human nature and history. There seems a powerful pride underlying this willful attempt to challenge fate by ignoring the lessons of great thinkers of the past and the very valuable modern statistical calculations of the 21st century.
The Bank of Japan met earlier on Wednesday and did nothing to mitigate or even rationally discuss (with their very interested global and Japanese public) the current impact of the consumption tax hike. Despite data points that show trouble occurring, they are not discussed. There is a distinct risk the reaction to this hike will be similar to that which occurred in 1997 when the Japanese economy went into a severe recession, the one that brought the financial system to its knees and almost destroyed the economy. Despite the fact that many Japanese economists and other analysts have pointed to this tax hike as a very badly timed strategy and that no strategies began until many months after the fact, the Kuroda-led Bank of Japan is repeating this error. The charts we have attached show all types of currencies are threatening a major decline against the yen. A move that would negate the Abe revolution and put Japan in a worse place than before it stated. The cycles are arguing that this decline could either grow at this point, or will be delayed until August, when the impact on the internal Japanese economy will be more severe than it is today.