Alfred E. Neuman, the beloved character of Mad Magazine, was famous for his deadpan look while espousing the philosophy, “What, Me Worry?”
While the world has certainly entered the madness zone, the world’s equity markets remain in bull mode, floating on a sea of central-bank provided liquidity. Russian support and arming of “rebel” groups results in the downing of a commercial airliner … no problem. An Israeli invasion of Gaza to thwart the nihilistic behavior of Hamas, and the markets shrug and offer up a bland response of, “whatever.”
The bottom line is that LIQUIDITY trumps all. Albert Einstein is rumored to have said, “Compound interest is the greatest force in the universe.” If he were alive today he would probably hypothesize that NEGATIVE REAL YIELDS HAVE THE ABILITY TO LEVITATE EQUITY MARKETS with a force greater than Archimedes’s lever. Again and again the global equity markets prove the power of negative real yields.
***A story lost in the gruesome headlines of war was the announcement that Brazil, Russia, India, China and South Africa, the so-called BRICS, are creating their own development bank to rival the World Bank. The proposed bank will be funded with $100 billion and the use of currency swaps. Much of the money will be fronted by China and it will provide an alternative to the U.S.-and European-dominated IMF and World Bank. The world’s previous third-world nations have grown tired of being ignored by their colonial masters and are seeking a louder voice in the world’s financial institutions.
This has been a long-time coming as emerging nations have been prevented from heading global finance organizations, even as they have increased their monetary contributions. In a Financial Times article, Douglas Rediker of the Peterson Institute said, “The agreement deserves applause but it’s a small first step in creating a new institution on the global stage worth of being spoken about in the same breath as the IMF and the World Bank.” It will not be an easy task for the BRICS but it certainly sends a message that the world is shifting and many of the previous colonies want their masters to make room on the global stage. The U.S. efforts to lay financial siege to any country deemed to be non-compliant with its foreign policy wishes is creating the need and desire for alternative funding sources. As long as world trade is priced in DOLLARS, the global banks (BNP comes to mind) need to transact through the U.S. money markets and thus are held captive to American political norms.
There were two FT articles this week on the issue of GOLD acquiring a greater role as a store of value and means of exchange, which is gaining ground as an acceptable alternative to the strings attached to the U.S. dollar. In the first piece, Neil Collins wrote, “This physical metal may merely wear a new label in the same bank following the transaction, and the more it happens, the cheaper the process becomes, and the more ways round in U.S. hegemony will be found. Using the dollar as a political weapon will [eventually] kill the goose that lays those golden eggs.”
In the world of sanctimonious use of sanctions, the world will tell the U.S. that it’s overextending its EXORBITANT PRIVILEGE, the reserve currency status of the U.S. dollar. John Dizard echoed Collins’ sentiments in the piece, “US Rules Make Gold the New Green.” Mr. Dizard notes that the idea of using gold as a medium of exchange is cumbersome but it is a task worth bearing to avoid the punitive actions of U.S. government overreach. But reputable banks can store assayed gold and utilize it as a medium of exchange for all sorts of international payments.
As the author notes: “An increase in the use of gold to settle transactions leads to a widespread rise in demand for physical metal held by reliable counterparties in secure vaults in locales considered safe from confiscation by a vengeful Justice Department.” The U.S. effort to sanction global financial transactions may not be the win-win that many in the U.S. foreign policy establishment perceive. Recent actions by many global actors reveal that the world is seeking alternatives to U.S. domination. It may help explain why the DOLLAR hasn’t rallied as much as the underlying fundamentals suggest. The world is unbalanced and 2+2=5.