Look to the East for Liquidity

We continue to see the impact from the  collapse of liquidity and erosion of value in the old world economies  flowing from the global financial crisis of 2007 and 2008.   The Wharton School of the University of Pennsylvania recently reported ( In Search of Capital ) that during 2009 angel investing in the USA in start ups declined a further 8.3% to $17.6 billion - following an earlier massive  drop of 26.2% in 2008.  This didn't really overcome the positive news that because deals were slightly smaller in size last year there was actually a 3% increase in the total number of firms that got financing.  If the US stops funding entrepreneurial activity there is something seriously wrong.

In June we saw Dave Kansas pose the question Did China Save Your Retirement in his Wall Street Journal article - proposing that unless the Chinese let their yuan appreciate against the US dollar US retirement savings were under severe threat - and expressing some relief that there appeared to be some signs that China appeared to making moves to loosen controls on their currency.  More recently we have seen the US legislature approve new laws empowering the administration to take punitive action against the Chinese unless they relax their currency controls.  I won't hold my breath.  Why should/would they?

To me the best indicators of what is happening is to watch where the private bankers and investment bankers are going with staff, infrastructure and to source capital.  And it's not Europe or North America. It's India and China.  Look at the example of Lombard Odier Darier Hentsch, the small and venerable old boutique Swiss private bank - which is boosting its Hong Kong team.  At the time it made this announcement in September it criticised it's larger private banking rivals also rushing to China stating that the days of product pushing are over and the future of private banking is "where the client is still the focus".  "The deleveraging that has occurred following the global financial crisis in 2008 has resulted in a structural change in the market.  It is not a cyclical change".

I am excited by this.  As an Australian living in our island at the bottom of Asia I am living right in the middle of the largest global power shift since the war.

What opportunity there lies for the brave and the agile!

Where to store value now? Not the US dollar!

I live in Australia and there is a lot of interest at the moment about the Australian dollar and where it is going against the currency of our major trading partners and against the US dollar - which most trade is nominated in as a reference currency.  Today one Australian dollar rose to a new high - it will now buy over 93 US cents - and just a year or so ago - it was about 60 cents.  The graph below shows how the Australian dollar has risen over the last few days.  Will it soon reach parity against the US dollar? This has only happened once before in my memory.

Australia imports a lot of consumer goods and a lot of its inputs for industry and construction - so a high Australian dollar is a good thing for most people on the street.  It is also good for Australian travellers abroad - and Australians love to travel.

However - Australia exports a lot of grain and agricultural products and also a lot of minerals (iron ore, alumina and many other metals) and energy resources (coal, natural gas and uranium) - which drives our wealth and standard of living.  For exporters a high Australian dollar is not good thing and damages our competitiveness compared to our major trading competitors such as Brazil, Canada and the US.

I came across this blog article today (http://blogs.marketwatch.com/fundmastery/2009/11/16/can-china-dump-the-dollar/tab/print/) which has one of most thought through comments I have read recently on the dollar and the interdependence between the Chinese and US economies.  Bottom line is that the US will not hurry to protect the declining dollar because it needs to maintain the interest of external investors in US nominated assets relative to the value  of their own currencies.

And China can't rapidly liquidate the $2 trillion plus it holds in US dollar reserves because it doesn't really have any alternatives other than the Euro or the Yen - and neither are really attractive to the Chinese because they don't really have the trading depth or liquidity of the US dollar.

Then this article gets to the punchline - which is that the Chinese have developed a strategy to hold their sovereign wealth reserves also in  commodities - hence their buying spree over recent months in base metals, soft commodities and fuels.  Some of these have been going into the rebounding industrial production in China, which has been increasing again during 2009:

But a lot of the commodities bought by the Chinese are just sitting stockpiles - they have bought far more than than they will consume in the medium term.  So the proposition is that the Chinese are storing value in commodities to reduce their reliance on their holdings of US dollars.

Still getting my mind around that one - it defies a lot of contemporary thinking and academic training - but after the meltdown of the global financial crisis - maybe people (and governments) just don't trust paper based assets any more - and are looking for something that won't disappear down a computer screen!

So getting back to the US dollar.  Maybe it will start to be replaced as the currency of exchange - and we will see more trade in other currencies - or dare I  say it - in gold!  Look at the rise in gold (and silver) prices in recent years (source: www.the-privateer.com ).  

We need to challenge a lot of accepted wisdom and really think about what is going on.  I have a few Chinese friends who tell me their families hold value in gold.  The Indians traditionally do too.  There just might be something in this traditional wisdom.