Capitalism of the casino
When I was in Hong Kong last week, I was told an intriguing story about George Soros. He is said to have taken part in last October's speculative attack on the Hong Kong dollar, which was beaten off; he is also said to have lost $2 billion as a result. There are two interesting points about this story: the first is that it is believed by senior figures in Hong Kong; the second is that it is not correct. Yet it is an example of the hostility to financial speculators which is spreading throughout Asia.
It is not only Datuk Seri Dr Mahathir Mohamad, the Malaysian Prime Minister, who expresses this hostility; many others do so more discreetly. The chairman of Goldman Sachs, Jon Corzine, recently went to Tokyo to meet and greet his bank's customers. At one meeting he found himself being attacked most virulently over his bank's role in global markets. Some Japanese tabloids have started an anti-Semitic campaign, blaming the financial troubles of Asia on Jewish speculators. I did not hear the least hint of anti-Semitism in Hong Kong, but even now one hears plenty of criticism of the damage done by global speculators. Popular anti-Semitism is also reported from the Asian Islamic countries of Malaysia and Indonesia.
There is danger in this. The orthodox economic argument, which many people in Hong Kong would accept, is that there was a major flaw in the policies of the worst-affected Asian states; speculators, led by the hedge funds, spotted the market anomaly and forced a correction. There is some truth in that - speculation succeeds only when it is based on reality.
At a popular level, the role of the speculators is not regarded in so benign a way. They are seen as the Germans saw the bankers in the inflation of the 1920s. Most Germans were ruined by the great inflation, but successful speculators became rich. In Asia, many businessmen have lost their businesses and many ordinary people have lost their jobs. The ultimate cause may be the weaknesses of Asian "crony capitalism", with its tendency to corruption, but the immediate cause was the withdrawal of funds by international bankers. Few of these bankers were Jewish, but the hedge funds undoubtedly acted as sniffer dogs for the banks, and many New York hedge fund managers are said to be Jewish.
In Japan, it is the Japanese banks which are currently imposing a destructive credit squeeze on small and medium-sized Japanese businesses. In yesterday's Financial Times there was a horrifying account by Michiyo Nakamato. "Japan's credit crunch is hitting middle-class homes, where executives are taking their lives ... companies find that the banks they had relied on all along are suddenly pulling out." This is happening to relatively healthy as well as to unsound businesses. The same sort of credit squeeze happened in Britain in the early 1990s, and many smaller British businessmen swore they would never trust a bank again. In Japan, some anger is being directed against international speculators.
The hedge funds are relatively small, with total assets of only a few hundred billion dollars; their function is to act as buffers between investors and markets. The big assets are those of the world banking system. Yet the hedge funds get their finance from the banks, so the banks know what the hedge funds are doing. The profits are made when a strong trend is established, which occurs when the big international banks pile in behind a market movement that has already started. Hence speculation in currencies tends to exaggerate fluctuations; one should not think of these currency traders as primarily in competition with each other, but as in collaboration with each other in building big waves. Such speculators, in an open global market, may serve a useful purpose in correcting anomalies, but at the expense of massive and recurrent destabilisation.
If one looks at the process from the point of view of Asian governments, it is almost intolerable. They may recognise the defects of their own system. The incoming Chinese Prime Minister Zhu Rongji's new economic policy is concerned to reform the Chinese banking system, to prevent over-investment, to take the Government out of business decisions, to reduce corruption and so on. But he plans to carry out these reforms before China considers making the currency convertible. It would be hard to argue that his task would be easier if China, as well as Hong Kong, had had to cope with the massive inflow and outflow of these speculative funds.
In Asia, there is the additional resentment over the dollar's monopoly as a hard currency. Asia has a much higher savings rate than the United States, and substantially finances the US Government. To them, it seems that the money goes from Washington to New York, to be used to speculate against their currencies. They blame America; they blame Westerners as such and some of them blame the Jews. It is becoming an ugly and unstable relationship.
The American response is to advocate more liberalisation, and to put the blame on Asia's past policies of restriction. I doubt whether the Asian governments will be persuaded to take the American view. At present, it is the greater China economy which has withstood the crisis best, though, as Mr Zhu points out, China still has massive anomalies to correct. Hong Kong and Taiwan have been protected by the stability of China, and China does not have a convertible currency. China is now, in purchasing power parity terms, the world's second largest economy. It seems likely that the Chinese will move slowly on capital liberalisation.
The International Monetary Fund has been holding a seminar in Washington on capital account liberalisation. The seminar reached the familiar Western consensus. As reported by Robert Chote for the Financial Times: "Asia's financial crises should not discourage emerging market economies from opening themselves to capital movements, but they should make sure domestic financial systems are strong enough to cope with big inflows and big outflows ... numerous speakers emphasised that the price to be paid for these gains was the danger of greater economic instability as money flowed in and out." They could well say that again.
In finance there are two perilous mismatches; one is the mismatch between currencies and the other the mismatch in terms of time. Those companies in Asia which borrowed in local currencies did not suffer when those currencies were devalued; those which borrowed dollars were hurt by the devaluations. Equally, short-term borrowing to finance long-term investment can never be safe. The Asian countries were building factories, offices, hotels and other business assets which have a long life, and sometimes a slow return. They borrowed funds which had flowed into their countries on a purely short-term basis. They assumed, wrongly, that similar funds would always be available. When the short-term funds were withdrawn, these businesses went bust.
Michel Camdessus, the managing director of the IMF, still argues that "it is clear in theory that free capital flows are a good idea. They offer borrowing countries the ability to finance more investment and promote economic growth". That is absolutely true of investments which are matched in terms of currency and timescale. Those investors who buy equity shares in the stock markets of emerging countries contribute positively to the economic growth of the countries concerned. But short-term speculative investments, which can move into and out of the currency within minutes, do not help to finance investment. The only use you can prudently make of short-term funds is a short-term use. Liquidity of the speculator can be achieved at the expense of the potential insolvency of the borrower.
There is now a huge financial industry which is purely speculative in character; it centres on the currency trading of international banks. It is deeply resented in those countries which have been ravaged by its inflows and outflows, however much they may have contributed to their own misfortune. Because it is entirely short-term in character, casino capitalism makes little net contribution to long-term investment. What investment needs is a proper matching of time to time; the world banking system, whether at the IMF level or at that of the Japanese banks, is failing to provide that match.
( I hate to say it but that would be bullish for gold ) .
An interesting read but I can't vouch for the sources, enjoy.
Go Gold !!!!!
ftp://ftp.shout.net/pub/users/bigred/vol11/cn11-91
If the ftp:// doesn't work try this and select the first story.
http://www.shout.net/~bigred/cn0.html
Go Silver !!!!!
farfel: I enjoyed reading your spirited posts about Japan yesterday. I don't think the 1990 Japanese bear market ( rather than an outright 'crash' ) was the doing of the US -- but it may have been due to the fact that the Japanese are more homogeneous and controllable then we are. The American economic system is more chaotic and varied, which is a handicap at times, and an asset at times. I prefer the American system of seeming chaos. Unfortunately, the more we rely on debt, the more we become 'synchronized' and at increasing risk for debt implosion ( sudden deflation ) . As sharefin has noted, the more in 'lock step' the markets are, the more at risk we are for a surprise -- either up or down.
Any opinions about the Japan situation? Or China? We could have another fire sale in gold, coming from Asia.
All: I alluded to some hot medical news in the above! Remember the excitement about margarine as the solution to our fat cholesterol problems? It turns out that commercially processed fats tend to be trans-hydrogenated, such as margarine.
There was a study of approximately 8,000 female nurses over a period of years, and some of the fat - heart disease controversy was resolved. It turns out that a 15% diet of poly- and mono- unsaturated fats from fatty fish and plants reduces the risk of heart disease about 20-30% over the period of study, but even 2% trans-hydrogenated fats increased heart disease risk by 87%! That is staggering information, and justifies what many individuals have suspected all along -- that appropriate natural fats are much safer for you than artificially modified ones, such as margarine. One might even imagine lawsuits on this one -- this probably beats the statistical evidence for the hazards of smoking.
The above came out of the Harvard Heart watch journal -- I will try to find the actual reference to the study when I have time. I assume it was prospective.
Another hot topic -- Lycopenes in Tomatoes appear to be part of the reason why Italians have such a low risk of heart disease -- Lycopenes are unusually stable, potent antioxidants, and they are apparently lipid and water soluble. By the way, the antioxidant story is not a simple one, because the human body has many detoxifying metabolic pathways, all of which would benefit by additional nutritional support.
I hope everyone is enjoying their new chjicken price index, and are weaning themselves off the old one -- the Big Mac hamberger index!
Badger -
I'm layering in silver trades. No telling where the bottom of this market is, but I worry about a run on 5.90 stops and a trip down to 5.80 or lower. Fund interest seems steady, but volume is very light. One or two good sized trades can break silver either way, with the advantage to the shorts.
Best you can do with a market like this is to buy less, but more often. I have been having moderate success just trading the 40 cent range, but this leaves me unsatisfied and cools my silver libido naught.
I like platinum, I think the gains will be had there rather than palladium, which is perched on the precipice of obsolescence. The Auto Industry doesn't like the Russian unpredictability. With palladium so high, platinum becomes the cheaper choice in auto catalysts. Since the Russian produce 60% of the worlds palladium, and only about 18% ( and falling ) of the worlds platinum. Retooling for platinum would leave the auto industry less subject to future uncertainties in supplies.
Gold is recovering from a prolonged illness and it will take some time before her cheeks are again rosy and there is a bounce in her step. I fear nothing lower than 280.
Back to the pits.
OK
By the way, I'm not to sure how important gold hoarding would be if we were to have a close encounter with an asteroid. I think I'd rather spend my time helping NASA or ? build rockets that could be used to deflect the asteroid. I also would be very happy to get rid of some weapons grade plutonium in a constructive manner the more megatons the better!
Good argument in favor of setting up a moon base too!
Do you know anything about the Lycopene story? Apparently Lycopenes are Vit A analogues, and may be the active ingredient in Vit A rich foods. This may explain why high Vit A levels are associated with low cancer risk for certain cancers, but that purified Vit A or beta carotene supplementation is ineffective.
We may not be making money in gold, but it does look like we will be living longer!
Hope all is well. Does seem likely the the Japanese CB director might resign. What do you think about Japan? Are they fixing their problems, or are they unsuccessful! We at Kitco are worried about more gold sales from SEAsia, like what happened near October 1997. Best wishes to you.
If you know any of Japanese that can post to us, please let him or her know. We need more info on what is happening in Japan. I would be glad to start the ball rolling for the sake of Kitco, if you give me an e-mail address.
Best wishes, and please make sure to duck! Looks like trouble ahead for you -- trouble for us may take a year, or longer to come -- unless a key Japanese bank collapses and brings down the world financial system.
Spanky: Had a long post for you and Astroinvesting, but crashed my 486XT.
Need to upgrade. Anyway, I have not seen Carolan's newsletter. In a brief post, I am convinced that the lunar 18.7 ( ? ) year cycle affects the markets, and the weather. Did a Bay of Fundy tidal activity study for the last 100 years. The problem is that Lunar tidal activity maxima and minima give you market turning points, but not their direction. Also, El Ninos tend to occur about 1 year after a tidal activity minimum. An index case was the 1929 situation, which was an unusually long term tidal activity minimum. The droughts in the US were correlated with severl severe subsequent El Ninos. March was a Lunar tidal activity maximum, so either the markets are probably going to take off, or peak, long term. So this time the situation is quite different from the 1929 era situation. I can't give a probability for the turning point predicted in March. Right now I am unwilling to make other predictions from the tidal data -- such as other turning points in the next few months. Will try higher resolution tidal/market comparisons if I have time.
By the way, this data should also work with precious metals investing -- it is just that the turning point directions and probabilities will be different.
Beyond that, I cannot make sense out of Astroinvesting, despite the fact that there is clearly something substantial that Mike Sheller can see better than I. What I need is a market turning point indicator that triggers on a market down or up equally well. Then it is a simple matter of correlating historical turning points with planetary positions. Tried absolute value of first derivative, but that did not help. With a good 'turning point' indicator, I could decipher or improve the Bradley index. With regard to Fibonacci series and the planets, I do know that the orbital periods of the planets are 'quantized', with the exeption of one planet - Pluto, I think. My guess is that there is a regularity in their positions as well, but I have not discerned what it is.
Hope the ramblings of a physicist helps.
Thank you for your astute comments. I would like to add that the Japanese and Chinese have one major ace in the hole when their currencies have problems. Financially speaking, they cannot allow the other Asian currencies to stay at such a devalued basis relative to the yen or yuan, or else China and Japan will have continued trade deficits with their Asian partners. This is unacceptable to Tokyo.
To aid the rest of Asian economies, and to keep the yen and yuan from falling at the same time requires that they take the dollar down with them. Slowly and judiciously of course, without obvious political effects... This will not be a pro-gold or anti-American decision. It will be for survival.
At first, I thought that if the dollar was to decline, I would buy Dmarks, but since much of the Asian problem is bad debt to Europe, I suspect that Dmarks will also decline, and will eventually force the selling of dollars as Europe declines. This leaves only one major asset which will appreciate in real terms, and especially in dollar terms. Take a guess.
The question now is when to buy gold. If Indonesia folds near term, there will still be a flight to dollars and another gold dip. Again, I find it hard for gold to rally if the dollar long bond rate is dropping, now near 5.87%, and still trending down. The dollar is still strong, but we're getting to a point where it cannot be sustained.
I have been so good today,I haven't raised my voice to anyone.I haven't called anyone rude names.I haven't yelled and screamed or ranted and raved at anyone.I haven't even broken anything or hurt anybody.
BUT LORD
I'm getting out of bed in about five minutes and i will proberly need your help then
cherokee - a long way to go to catch you, but 3 calls is a start!
I think Larryn has an excellent point about bringing down both the US dollar and the Japanese yen together. The Japanese do have an advantage with a strong currency, in that they can buy or build factories in other SEAsian countries for their business. However, inflating their currency some more would help their property overvaluation/debt problem ( demonetizing debt ) . Also, it is about time for the Europeans to start weakening the US dollar so that they can attract attention to the EURO as a dollar substitute.
So we come to the insecapable conclusion that dollars will be sold and gold bullion will be bought by someone - soon. That may only be the 'closing out' of the 8000 tonnes of gold loans , but the effect will be the same as gold purchases.
The only problem with the future gold bull is that any major implosions in SEAsia, South America or Europe would lead to big time gold sales, not purchases. We gold bugs will be walking a tightrope until all of the major debt deflations are over. Until then we must take care not to get squashed.
If I had infinite patience, I would do like AG, and put most of my assets into something nearly bulletproof, like short-term treasuries, or gold bullion. And then I would wait. But -- unfortunately, I am not that patient.
But this is a gold discussion group, not a social science laboratory. Now that you have nonetheless successfully conducted your experiment and obtained your results, please begin to focus your comments on gold.
To: JTF You said: "I would gladly help if you can think about how we can get some Japanese posters. I think we would all benefit from some more input from that part of the world."
I'm game. How about: I would gladly help if you can think about how we can recruit them?
To OLD GOLD: I direct your attention to farfel's 19:12 as a possible explanation for the amount of anti-minority sentiment we've witnessed here. It might be interesting to correlate the number of anti-minority sentiments here with the price of gold. My guess is that we'd see a lot fewer in a bull market if we could ever get one.
I think it was on CNN. Or maybe ESPN.
Gold? That doesn't 'grow', provide fixed income return, or do anything 'exciting'. So why should they buy it? For the moment, let the Russian's provide us with some action in the 'white' metals........
Besides, losing money always puts me in a foul mood....... ( Then again, if I were a bird, would I be in a fowl mood? English, what a language. )
We do bidnes heer in Arkansas too!!
:- ) )
Lighten up folks.
http://www.mountwashington.org/weather/dd.htm
Kind of reminds me of the gold market...
Cool, 'breezy', overnight temperatures anyone??
Kind of reminds me of the gold market...
Latest News.Hashimoto to visit Indo. for arm twisting session.
http://www.asahi.com/english/enews/enews.html#enews_13205
the gold from the sunken gallions around Cuba.
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