 Casey Files:
"I'm from the Government
and I'm Here to Help"
Fitzroy McLean
Without
Borders
Casey Research
Aug 21, 2008
Ronald Reagan once said those
are the nine scariest words in the English language. And he's
starting to be proven right.
World markets have been watching
with bated breath lately as the dynamic duo of Paulson-Bernanke
has mounted the Hill (or has been mounted, as it were), on several
occasions recently, soothing the markets, politicians, and public
with calming words about liquidity, regulation, and "bottoms."
Even the POTUS (that's President of the United States) has made
a few well-rehearsed remarks about the economy, energy, and our
friends Fannie and Freddie. And in response, politicians have
wasted no time in jumping in front of anything with a lens to
demonstrate their commitment to "fixing" things.
Unsurprisingly, most of our
esteemed congressmen and senators have left no doubt that they
collectively lack any understanding of financial markets or basic
economics. And quite frankly, we find it insulting (despite the
fact that Wal-Mart reported a surge in plasma screen television
sales post-stimulus check and further data indicate that online
pornography sales were up sharply); people aren't as dumb as
Washington hopes. Even without an academic understanding of economics,
the lowest common denominator in society is noticing fewer Miller
Lites for his dollar at the checkout line, and that reality cannot
be hidden with political rhetoric. At this point, it's safe to
assume that, with a few notable exceptions like Cheerleader-in-Chief
Larry Kudlow, most people know the largest economy and most widely-held
currency in the world are in trouble.
The following points are likely
subject to question and interpretation:
1) What's causing
this,
2) How bad can it get, and
3) What can be done to limit its effects?
It seems clear to us that the
political and media establishment have jumped immediately to
question 3 without really stopping to consider the first two.
This reminds us of Army doctors who robotically prescribe a strong
dose of Motrin to treat pretty much every symptom under the sun
without ever devoting a token amount of time to determining the
root cause.
The proposed remedies have
been far-reaching: from banning speculation and short-selling
altogether; to providing yet another round of fiscal stimulus
(hey, the digital TV switch is only a few months away); to creating
the new New Deal whereby Mother Government will employ
large swaths of workers to rebuild our deteriorating infrastructure.
So what are you waiting for, comrades? Pick up a shovel, there
are dams to build!
From a social perspective,
we know we're at a turning point when friends who once decried
our misadventures in seeking faraway contrarian fortunes are
sending us emails saying, "Hey, uh, can you tell me again
about Panama?" They are realizing that, as we explored last
month in our Dispatch from Dubai, personal liberty is not always
best protected in a democracy. How much freedom does one truly
have in a government controlled by herd mentality? People are
smart enough to realize that they have absolutely zero power
to affect change in a country with hundreds of millions of different
perspectives. At this point, the idealists usually say something
about starting a grassroots campaign to "raise awareness"
and -- as utopian as this sounds -- who has time for such things
when everyone is struggling to pay for the skyrocketing costs
of daycare, healthcare, education, food, and transportation?
At the end of the day, whether
we live in totalitarian Zimbabwe or the United States of the
North American Union, we are left with the freedom to choose
between "take it" or "leave it." The former
is a resignation to accept the things we cannot change, complain
prodigiously, and make the best of it. The latter implies a rewarding
adventure in seeking a new breeding ground for personal liberty.
Chances are, if you are a subscriber to this humble publication,
you are at least sitting on the fence and probably leaning towards
the "leave it." Don't feel guilty; you are not alone.
A recent study from US News & World Report indicates
that a growing number of North Americans are joining the ranks
of the new "lost generation," except that the group
seems to be truly pan-generational; young and old, we come across
a surprising number of expats scattered across the globe, ranging
in age from 18 to 80. Some are seeking entrepreneurial fortunes;
others are seeking to stretch their retirement savings; others
are escaping the rat race; yet the commonality seems to be a
clear distaste for the direction that things are headed -- and
absolutely no one thinks that it's getting any better. This new
generation finds the concept of swearing blood-oaths of allegiance
to gerrymandered figments of Winston Churchill's alcohol-induced
imagination to be a bit antiquated... god save the queen and
all that.
For everyone else, the Social
Contract experiment has worked well, and people around the
world see governments not only as an inextricable part of their
lives, but also, in many cases, as a means of support and comfort.
Take Pakistan, for example.
Last month a small army of individual investors looted the stock
exchange in Karachi because the market had lost about 40% of
its value over a few month's time. Rather than take their lumps,
they rioted, demanding that the government 'do something!' And
something they did. Markets were calmed, albeit temporarily,
based on Finance Minister Naveed Qamar's assurance that a 20
Billion Ruppee 'fund' would be activated to bail out small investors
and save them from their losses. Seem like complete insanity?
Yet one doesn't have to look hard to see similar instances around
the world, whether it's larger pensions in Italy; a shorter workweek
in France; cheaper maize in Mexico; or soon-to-be-reproposed
universal health coverage in the United States. Mother Government's
responses to declining and turbulent economic conditions also
fit in this category.
The question is: Where does
all this bailout/social welfare money come from?
Apparently thin air. With declining
tax revenues in a down economy, governments around the world
have been stepping up to recklessly spend more, usually borrowing
from the haves and giving it right back to them in interest
payments or proceeds from importing their wares. There's one
problem though, at least for the U.S.: The Financial
Times recently reported that Arab and Asian funds are cutting
their exposure to the U.S. dollar. Can't really blame them. For
years they had been buying U.S. debt and recently switched to
ownership: real estate, public equities, etc. But their cash
infusions from private capital injections over the last twelve
months have withered as the market value of major financial stocks
continues to deteriorate. At this point, there is little course
of action remaining other than to continue deflating the value
of the currency by printing more money.
So, many developing markets
are experiencing significant inflation because of a surge in
foreign investment (which normally has the effect of driving
up wages and asset prices), as well as rising commodity prices.
Even though commodities are generally priced in USD, many developing
markets historically peg their currencies to some multiple of
the dollar, so they feel the inflationary effects of rising corn,
wheat, and oil as well. De-pegging would usually cause their
currencies to strengthen against the dollar, mitigating the inflationary
effects of rising commodities prices. Sounds great in theory,
but many developing markets have been focusing on pro-growth
policies, allowing inflation as a necessary evil. In our view,
this trend is changing rapidly.
As we have discussed earlier,
it doesn't take too many riots for governments to give in and
'do something.' Unfortunately, this has historically been a far
cry from actually 'accomplishing something' because, after all,
you can always blame the other political parties. Our assessment,
however, is that the great constituency is growing impatient,
and as family budgets around the world are stretched thin in
the face of a myriad of other challenges (real and perceived)
like climate change, energy scarcity, and population growth --
governments will eventually adopt freer market policies with
long-term benefits. Argentina's recent decision to eliminate
export taxes for agricultural products is an indication of this
trend, even in a highly leftist regime. China's reduction of
fuel subsidies is another.
The great shift in defending
against inflation will likely culminate in many developing markets
abandoning their dollar pegs and floating freely. Last year,
Kuwait and China broke away from their strictly USD pegs in favor
of a basket of currencies which includes the euro, yen, pound,
ruble, South Korean won, Thai baht, Aussie dollar, Canadian dollar,
and Singapore dollar. Kuwait has been the most hawkish of the
GCC about the dollar, at least publicly. The country, which has
the world's most highly valued currency (its currency unit buys
the most of any other currency unit), made the change in preparation
to switch to the proposed GCC single currency, the Khaleeji,
when it debuts in 2010 across Saudi Arabia, the UAE, Qatar, and
Kuwait.
As long as the world's energy
trade balance favors the Gulf, our expectation is that the new
currency will perform well against the dollar and euro, and it
is likely that other members of the currency bloc will flirt
with de-pegging prior to 2010.
The same analysis applies to
China's renminbi (which literally means "the people's currency").
Prices may rise and growth may fall, but China will likely maintain
its status as a worldwide manufacturing source and export-intensive
economy; and turning a cold shoulder to U.S. dollar-denominated
investments will put significant upward pressure on its currency.
One way to profit from this
trend is by buying into the currencies themselves. EverBank (www.everbank.com) has a host
of international currency deposit accounts, including a Chinese
renminbi money market fund. Alternatively, some investors are
putting money in the Chinese renminbi exchange-traded note (NYSE.CNY).
Beware before buying the renminbi ETN: You are accepting counterparty
risk from Morgan Stanley so do not buy CNY if you think
Morgan Stanley won't be able to pay the note.
Personally, we are much more
comfortable with Barclay's Asian and Gulf Revaluation Fund (NYSE.PGD).
This fund covers five currencies that are currently pegged to
the U.S. dollar, and the fund stands to gain substantially if
the pegs are revalued. The currencies include Hong Kong, Singapore,
China, the UAE, and Saudi Arabia, and we are comfortable betting
on the trend that at least the latter three will rise substantially
against the dollar.
PGD charges a 0.89% management
fee and was just recently introduced in mid-June. Its volatility
will likely be mild, until, that is, one of the five countries
revalues its currency.
Fitzroy McLean
Fitzroy McLean is a co-editor of Without
Borders,
the spirited and highly profitable new monthly advisory service
from Casey Research. A former military man turned spy, Fitz eventually
came to his senses, trading in his cloak and dagger for a briefcase
and a degree from Oxford, then set out to use his unique skills
as a successful fund manager and full-time international entrepreneur.
Fitz and co-editor Simon Black, another former intelligence operative,
are on a nearly non-stop quest around the world looking for the
best places to easily diversify internationally (and, in the
process, enjoy the best life has to offer).
There's no
other newsletter quite like it. But don't take our word for it:
a 3-month trial subscription with 100% money-back guarantee allows
you to experience Without Borders for yourself at no risk. Learn
more by clicking
here now.
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