Turbulent Times ahead before the dawn of the Tri-polar Economic Order

Art, 20 Mar 08

Mar '08: FED cut rates, giving the stock markets some cheer. As a double edged sword, it also convinced the world that US has lost its interests in maintaining its USD value. As most things are traded in USD, commodities will be re-priced higher and higher by the day as producers know that they will be collecting a depreciating paper in their hands. In view of the premonition of high inflation period and subsequent economic slowdown, commodities are heading toward its peak, which is in a highly volatile zone, where soft commodities will gain more than hard commodities. Commodities related currencies (AUD, RUB ...etc) will also experience similar swings. Those USD pegged currencies will also be de-pegged or revalued up.

Apr '08: The US housing debts cannot be swept under the carpet for too long, as the foreclosed sub-prime houses will deteriorate to a point that it is better to demolish and rebuilt from scratch. It will take time and money which the US’ poor would not have. The US houses prices have dropped 20% and it is expected to drop further (10% or more). It will further depress the overall US housing assets values, spreading from sub-prime to alternate-A then to prime housing loans, forcing banks to further write off loans, as growing loans’ delinquencies turn to defaults.

May '08: As mentioned in my earlier blog, as inflation and unemployment build up, it will also trigger defaults of other forms of personal borrowings. US will try to stagger out the pain so as not to cause a US financial systemic failure. The FED will step in again to rescue by lowering rates further, but it won’t be of help as falling asset values or principal sum risk are much more detrimental than a few dollars saved from interest charges. USD will weaken even further against almost all other major currencies.

Jun '08: With a weakened US consumer demand, it will hit the corporate America, causing defaults of the US corporations that serve mainly American customers, e.g. the weaker American car-maker, housing companies…etc. (Though the international US MNCs will be able to survive through exports, which mean some companies will gain mildly during this period while others will fail miserably). The star of the show is US Treasury printing USD800 for each citizen to spend the money, but it will mainly be used to pay for interests to the bank with hardly anything left to spend on. Though USD has been weakened significantly over the last 7 years, from EUR/USD 0.85 to 1.6, the US export has improve marginally as the inflationary imports of oil and others has offset the export benefit, resulting in continuous high US trade deficit.

Another steriod injection of aggressive FED cuts, weakening USD, with the hope that US can export its way out of recession, but due to the above mentioned, it will only mitigate the trade deficit only to some extent but balloon the current account deficit in 2008, because, by weakening the USD too rapidly, it also pushes the USD off the cliff, ie, as the store of value, causing the world to diversify out of their high USD and US assets holdings (especially US government bonds).

Jul '08: With some free government cash in the pockets, some positive retail sales figure, and a normal cheerful summer mood, the US consumers and financial markets may gain its last confidence of the US economy.

....to be cont.