Markets, Currencies, Gold and Geopolitical Equations

Trust markets to save the surprise element for a well-drafted climax. The stage was all set for a thriller action-packed movie whose story was supposed to be something like this:

US Government reduced interest rates, encouraged borrowing, created asset bubbles, and made people believe that bubbles are here to stay...everyone and their grandmothers minted money where ever they put their investments...everyone's happy...then came crisis, 'something's gotta give' proponents were proved correct - and then...Lehman happened...all hell broke loose...Intermission !

US released approx. $ 1.7 tn of funds into the markets, bailed out "too big to fail" institutions, and things started improving...some jolts came from Europe's crisis pockets, but they too were managed by showing strength of confidence and trust in Euro and Euro-zone. But as time elapsed, people realized things were not improving...jobs were still getting lost...growth was still anemic, foreclosures were still setting newer records...and the US Government (better known as G'mint by now), was under pressure again. US G'mint has to seem to be doing "something" in the face of obvious debacle in mid-term elections.

US Federal reserve releases money into US's banking and financial system, thinking they'll be able to spur growth and depreciate their currency against others - giving them a double benefit (dollar depreciation helps US in improving exports, eases interest payments on debt)

Meanwhile, the economists and analysts, both independent and attached to large investment houses worldwide denounce the policy...(with yours humbly included in this crowd) and prophesy that dollar will depreciate against all currencies, all right, but US financial system will die a slow death, (ok there was a divide here with some calling for a deflation), and all other assets in all other markets will shoot up...(of course, no Top for Gold in sight)

And out comes the market, with the final verdict - the worst of both worlds - Euro crisis breaks-out first, US dollar appreciates (like Zero Hedge wrote in one of his posts - People see it as a Bullish sign for dollar that US will default Later than Europe !). Markets worldwide tank...China raises its interest rates in anticipation of free dollars flowing in...Euro loses value, all commodities go down, markets tumble, even Gold tanks...The End !

I know that its still too early in the day to talk about the "outcome". We're still quite far away from playing out the entire game. On these lines IceCap Asset Management has come up with an excellent (and funnily sarcastic) view of the overall game-plan (HT: Zero Hedge)...(you can see the Nov 2010 report from Icecap here). A small preview of what's in this report:

With the QE2 announcement now out of the way, Mr. Bernanke’s game plan is as follows:

1. Lower interest rates for "everybody" and "everything"
2. Stocks & Bonds will then increase in value making "everybody" and "everything" feel wealthier
3. "Everybody" will then start to buy "everything"
4. Pray that the price of "everything" doesn’t increase too much and therefore cause "everybody" not to buy "everything"
5. If steps 1 to 4 are successful, businesses will begin to create jobs for "everybody" because they will once again be buying "everything"
6. Ignore the housing market problem
7. Ignore the debt problem
8. Ignore the effect of numbers 6 & 7 on the banks
9. Pray that foreigners continue to buy newly issued American debt

The report is a good read...please do take time out to go through it.

The point here is, the crisis in Europe has not gone away...and again predictions of who's next (after Ireland) have started pouring in...neither has US taken the right step by taking on more debt to get out of their debt trap, and they will pay for it sometime or the other...there is an increased coordinated activity globally on debasing dollar as the world's reserve currency, on acquiring Gold by central bankers - either through market or stealthily through un-announced mines acquisitions...the banks are on the edge again, with over 900 banks closing down in US alone in the last year or two, (and expectations from European banks are no better)

The way it is, (HT: John Mauldin - for giving this perspective) its not really about the markets / asset bubbles per se, there is a larger game at play here - that of Confidence and Trust. Confidence on Governments, on Growth, on policies and policy changes...Trust between banks and FIs, between countries, between two counterparties exchanging commodities for Dollars. At a really broad level, its a Geopolitical failure...with Governments not taking enough / correct steps, thinking of their economy as mutually exclusive from that of trading partners and global economy... In the past as well, many recessions were due to lack of confidence and a complete break-down of trust...even the crisis that started in 2008, was triggered when banks stopped trusting each other with their money...that's when the financial juggernaut stopped rolling, and government pushed in money thinking it'll lubricate the system and things will be smooth again...

Like Soros said recently, the "new world order" is emerging...lets hope once the game is played out completely, we'll make a fresh start with Confidence and Trust.