Notes From Underground: Will the last person at Davos please sweep out the stables?

All we can do is ponder why Davos is in the limelight again. This self-absorbed group is meeting of under the banner of the World Economic Forum again to discuss the problems of the global financial system. If we took a roll call, we would find that most of the attendees were the meglomaniacs who got us into this mess. Yes, we know that Nouriel Roubini and other doomsters are there to ensure some debate. But as always their views provide the comic relief of court jesters. Maybe these leaders of industry and all-right thinking will find new ways to look for aid from world governments after their ill-thought out plans go awry. Adam Smith himself warned of “Kapitalists” and their acts of subterfuge emanating from cocktail parties. Enough is enough, but we wished to put an end to the nonsense that is reported out of this Potemkin village of intelligent thought.

The news was all Asia today as the Chinese moved again to raise the reserve requirements to curtail the loan activity that is feeding 10.7% GDP growth. To put it in perspective, these small, incremental moves appear to be shot across the bow at international investors than to be any serious attempt to halt Chinese growth. The policy makers of China have yet to follow some other emerging countries down the path of taxing investment inflows, but they are certainly aware of the impact the huge amount of foreign direct investment is having on their economy. We will be on the alert to see if these incremental moves have any impact. If they fail we will probably see some type of moderate exchange controls.

The Japanese DEBT market was downgraded today to a negative outlook. The move had a momentay effect on the YEN, but as the risk off mindset resumed control of the market the YEN ended the day very strong versus all the major currencies. Now that the Japanese have stated their unhappiness with recent YEN strength, the markets will test the BOJ and Finance Minister Naoto Kan’s resolve. The Japanese will be cautious to do anything of major impact as the G7 meeting is very near and they don’t wish to be the odd one out at the meeting. Economically though, the deflation that persists in the Japanese economy cannot tolerate an appreciating currency. There is no easy solution at hand but the crown rests very uneasy on the head of the Japanese policy makers. Throw in the current strains with the U.S. over the military base on Okinawa and the intervention question is that much more difficult. (Note: the accompanying article was written by my son, Tobias.)

The trade story of the day is how well GOLD performed with the unwinding of so much risk. The risk-off algorithm has sent GOLD down every day that the equities and commodities have fallen. The early story was more of the same but GOLD resurrected itself and ended the day higher. This may be a mere one-off event but it has certainly caught our attention, and from a fundamental view, it makes perfect sense.

While the Bernanke confirmation and Scott Brown election has distracted the media, the problems of the global financial order continue. The Greek bond auction went very well yesterday in that bid to cover was almost 4 to 1. However, the 2-10 German/Greek spread barely budged, indicating that the ostensible problems will be there until there is some type of wealth transfer from Germany to shore up the Greek economy. It was interesting to see that 78% of the Greek auction went to foreigners. Some brave investors believe that Greece will not default and that they are getting a EURO-based investment and picking up an extra 300 basis points over German rates and even 200-plus over Spain and Italy.

In addition, Luxembourg Prime Minister and Finance Minister Jean-Claude Juncker protested that the EURO was too strong versus the YUAN and the DOLLAR. Between the difficulties in Japan, European uncertainty and the political machinations of Washington, no wonder the GOLD defied the correlations of the risk-based algorithms. Somebody is buying a stairway out of here!

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One Response to “Notes From Underground: Will the last person at Davos please sweep out the stables?”

  1. Andy Says:

    I really enjoy reading your great insight. Keep up the great work!!!

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