|
"Under present
conditions, no sensible person can expect that owners of dollar balances will
wait, undismayed, until the only liquid assets that are the counterpart of
their claims vanish... Of course, interest rates tend to decrease at the
beginning of inflationary periods because there is an abundant supply of
money... The quest for tangibles, gold, real estate, and works of art, which
is the inevitable counterpart of reducing cash holdings or assets denominated
in currency to a minimum, accounts for all the features of the monetary
disruption developing before our eyes..."
Jacques Rueff, The
Monetary Sin of the West
Lately, much
attention has been focused on the role of the private equity-hedge fund-prime
broker nexus in fuelling financial excess and rampant asset price inflation
in just about any market one might care to name, but this is not to say that
there is no evidence of more traditional market madness taking hold
elsewhere.
Take, for example, a
Chinese market which seems to have learned from the late excitement in
February only that it may ignore, with near impunity, any strictures
emanating from Beijing about its unruly behaviour. Indeed, so convinced are
both retail and institutional players of the upward trajectory that the index
shot to a six-month gain of no less than 179% by mid-May - and this despite
yet another two hikes in the reserve ratio and one in the lending rate being
announced by the PBoC and with not a moment's thought being given to rumbling
of another clampdown on 'suspicious' share movements emanating from the
nation's securities regulator.
Three months ago,
rumours that state-run asset managers were selling stocks had helped
aggravate a sudden double-digit decline. But already, only eight weeks on,
this particular tiger seemed have lost its teeth. Certainly, that is the
construction we could attach to the total disregard which was paid to
comments made in late April by Gao Xiqing of the National Council for Social
Security Fund.
Revealing that the
Fund would have to sell up to a quarter of its equity holdings (if only in
order to come back into compliance with its investment guidelines), Gao told
a conference audience that:-
"This market
seems to be defying gravity. It's got to come down at some point. We can't
risk that, especially given the nature of our fund. The market is making me
nervous."
Mr. Gao may well have
been biting his nails, but his forebodings were clearly not shared by those
investors who bid the CITIC IPO to a point where the bank was valued at
approximately half of the worth of that other, less exotic target of insistent
desire, ABN AMRO; this despite the fact that the latter not only has an
incomparably greater pedigree but that it recorded earnings almost 12 times
as large as its Chinese rival last year.
Nor would there
appear to be much anxiety being expressed (except of the inverse kind of
being left out of a booming market) by those eager, would-be punters in the
shares to be issued by BOCOM, China's sixth largest lender; a crowd who
between them submitted bids of no less than $188 billion (a total larger than
JP Morgan Chase's entire market cap).
Don't think, either,
that the feeding frenzy was restricted to financial concerns, for the listing
of aluminium giant Chalco's shares in Shanghai saw them triple in value on
the opening day- reaching a lofty vantage point where they were double the
price of the Hong Kong equivalents and grading the company at a P/E roughly
twice that of its two main western competitors, Alcan and 8% shareholders
Alcoa. (This should prompt a cynic to wonder if CEO Belda could not do his
shareholders a lifetime's service simply by backing the firm into its Chinese
partner, using paper issued into the manic, mainland market to effect the
transfer).
Of course, while this
trend persists, official attempts at cooling the bubble will also prove
well-nigh impossible. Given that only some 45% of the record-breaking
quarterly foreign exchange reserve influx of $136 bln can be attributed to
either the trade surplus ($46.45 bln) or to reported fixed direct investment
receipts ($16 bln), we are left with the conclusion that over $20 billion a
month has found its way into China - legally or otherwise - in order to
speculate on a further appreciation of either the Yuan, or the Composite
index, or both (circumstantially, we might note that IPO receipts so far this
calendar year amount to some $50-odd billion - surely a close enough
correspondence for a conviction to be secured).
Thus, we can expect
the Chinese policy dilemma (or 'trilemma', if we adopt Robert Mundell's
formulation) to persist for some time yet and, therefore, for the country's
undoubted (and already impressive) secular advance to be overlaid by a far
less stable, but all too tangible, hothouse atmosphere, driven by a sizzling
degree of monetary stimulus.
All well and good,
but what are the implications for the commodity investor - or indeed, the
hard-pressed commodity producer?
For one, it seems
that the inflationary engine may be about to change gears as excess foreign
exchange reserves are no longer passively 'recycled' back into holdings of
the sovereign and semi-sovereign bonds issued, especially, by the two main
external deficit nations, the US and the UK.
It is no secret that
the Asians are becoming both a little embarrassed by the sheer scale of their
chronic surpluses and a touch disquieted at the depressed returns attainable
on these hoards (the second a partial consequence of the first).
One or two of them -
as well as a number of their equally accumulative counterparts among the
energy-producers - are also keenly aware that, for so long as they choose not
to subject their exchange rates to the unchecked caprice of the broader
financial market, their only current alternative is to tolerate the
heightened inflation which follows unless every last dollar of the forex
influx is properly and exhaustively sterilized. They are further beginning to
realize that even this policy is an act of fire-fighting which only serves to
perpetuate the problem by precluding the imposition of any meaningful
monetary restraint upon the prodigals abroad.
Thus, there is much
talk of emulating the performance of Singapore, Norway, and Abu Dhabi by
using the reserve balance much more actively as an 'investment' vehicle (we
use the quotation marks because we are inclined to view the role of the
public sector in investment in only a little less jaundiced a fashion than we
do its occasional pretensions to exercise an entrepreneurial or managerial
function).
Not only have Taiwan,
Korea and China publicly begun to muse about such plans, but the Japanese are
said to have a prime ministerial task force hard at work on the potentials
and pitfalls were they to follow suit with some part of their $900 bln
cashpile. Only this week, the Russians became the latest to announce similar
intentions - their plan being distinguished mainly by virtue of being
furbished with an actual starting date for implementation, namely 1st
February next year.
Thus, with all four
of the world's four largest owners of surplus currencies (preponderantly
denominated in USD) rethinking their utilization, we have before us the
following, tantalizing prospect.
Firstly, such of this
$3 trillion mountain as is redeployed will presumably shift one
cadre of important marginal buyers of financial assets into acting so as to
help stabilize the inordinately low risk spreads which currently prevail. Ironically,
such funds will probably come to cultivate a penchant for 'alternative' investments,
thus providing a hitherto untapped source of leverage by buying into hedge
funds, derivatives, and private equity (as has, in fact, already been
announced vis-à-vis the Blackstone group).
Secondly, the
managers of the new funds will certainly seek out direct participation in
'growth stories' and so may help to underpin the tentative steps already
underway which are aimed at delivering more of the thrifty Asians' and other
emergent nations' financial capital directly into the tender-cars of their own,
regional locomotives, instead of washing though commission-hungry Western
intermediaries whose sense of priorities cannot fail to be misaligned with
those who ultimately underwrite them.
Thirdly,
resource-hungry nations will presumably seek out more of the requisite
resources or - at the very least - they will look to acquire meaningful
equity participations in the producers and processors of such resources, as
also in their equippers and service-suppliers.
After all, if, say, a
China can help finance an expansion of output of, say, base metals - all to
the good. If such a task turns out to be beyond physical accomplishment -
well, at least the rising share price of the miners will provide some sort of
offset to the higher import bill to be expected.
Fourthly, by spending
more money either on goods or on the co-ownership of productive assets abroad
- rather than unimaginatively financing the warfare-welfare states of, and
abetting blind real-estate speculation in, the debtor nations, as at present
- the process of 'rebalancing' away from an inordinate reliance on
Anglo-Saxon overconsumption and financial prestidigitation would be greatly
facilitated. In return, the enhanced inward flow of products would mitigate
some of the worse impediments to further progress being felt at present in
several of the surplus nations.
Moreover, given the
possibility that the American house-owning sector might soon be forced to
curtail its recent, debt-fuelled over-indulgence, the emergence of such an
external source of both capital and sales revenues for viable
businesses, there and elsewhere, would be a welcome offset to any temporary
diminution of spending which resulted.
Indeed, one could
almost imagine a virtuous circle whereby a one-off devaluation of the
offending currency was underpinned by a thoroughly salutary reduction in
consumptive borrowing (assuming the inflationists at the central bank and the
New Dealers in federal government can each resist the urge to interfere too
much). This would lead to an overdue re-emphasis on export markets, added
value endeavour, and employment income as the mainstay of spending power -
and so provide a welcome contrast to the unmatched imports, inflationary
finance, and individual improvidence which pose such a profound threat to our
general prosperity today.
If, along the way,
real resources were to regain an advantage over financial fictions - if more
money was then made mining molybdenum than manoeuvring over a merger; if
Canadian oil sands performed better than credit default swaps, if
manufacturers of hedge cutters earned more than managers of hedge funds - who
would we be to argue?
Sean Corrigan
Sean Corrigan is Chief
Investment Strategist at Diapason Commodities Management (Lausanne and
London)
Copyright © 2006 -
Copyright © Diapason Commodities Management - Sean Corrigan
| 
