George Soros, James G. Rickards, & EL-ERIAN: Central Banks Are Creating Financial Instability, Capital Markets Are On A “Critical State” And And Are “Potentially Prone To Collapse”. There Is A Lot At Stake, For Both Current And Future Generations
While the crisis in Europe is first in Goerge Soros’ mind because it is the “hottest” risk flare currently, his biggest concern in what he calls the “disarray in global cooperation,” or what we would call ‘dueling central banks’. “The almost universal adaptation of quantitative easing,” worries him and he notes that “Europe is the last bastion of orthodoxy,” in this regard as the aging hedgie warns, “Europe is entering a situation that Japan is desperate to escape from,” as “Japan has just abandoned – after 25 years of stagnation – a process that Germany is just in the process of imposing on Europe.” But perhaps his clearest concern in this brief clip is that no matter what we are told, the central banks’ actions are ‘creating’ increasing financial instability because, “let’s face it, quantitative easing is really and directly competitive devaluation.” But it is his comments on the actions of the BoJ that should be most concerning as he stated to CNBC, “What Japan is doing is actually quite dangerous because they are doing it after 25 years of just simply accumulating deficits and not getting the economy going,” as he fears should they actually get something [inflation] started, “they may not be able to stop it.” If the yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then “the fall may become like an avalanche.”
From INET (brief):
There is a lot at stake, for both current and future generations
The United States is at war, but not in the conventional sense. There are no troops on the ground. There are no drone strikes. Instead, the weapon of choice is the US dollar and the “enemy” is America’s trading partners. Welcome to Currency War III.
That, at any rate, is James G. Rickards’s view of the world. In a presentation at the recent Global Investment Risk Symposium, Rickards, a partner at JAC Capital Advisors and author of Currency Wars: The Making of the Next Global Crisis, outlined the case for why the international monetary system is dominated by currency wars. He also argued that capital markets are complex systems that are bordering on a “critical state” and are “potentially prone to collapse” — and that the US Federal Reserve risks “melting down the system.”
As Rickards sees it, we are well into the third currency war of the past 100 years. President Obama fired the first salvo during his 2010 State of the Union address, when he announced the launch of the National Export Initiative and said the goal was to double exports over the next five years. The easiest way to do that, of course, is to cheapen the US dollar. But that is only part of the explanation, Rickards said.
In enjoying the ride on this huge wave of global central bank liquidity, investors should not lose sight of two key elements:
- The increasing scale and scope of the collateral damage and unintended consequences of unconventional monetary policies; and,
- Over the longer-term, the still-unanswered (yet critical) question of whether central bankers will succeed in engineering a handoff from “assisted growth” to “genuine growth” or, instead, see their experiments end up in tears.
We all want central banks to succeed in promoting economic growth and enhancing job creation. There is a lot at stake, for both current and future generations.
Such success would also allow for economic and company fundamentals to validate current artificial pricing in many market segments.
Should success prove elusive, however, the major investment theme will pivot quite suddenly: From the benefits of riding the huge liquidity waves to the urgent importance of minimizing exposure to collateral damage and taking advantage of the inevitable market overshoots.
In closing, remember this simple analogy: Central banks these days are like a pharmaceutical company that feels compelled to bring to market medication that has not been clinically tested. In eagerly taking the medication, investors should focus not just on the immediate upside and its durability, but also on the longer-term impact of potential side effects.
A short visual explanation of Japan’s debt problem by Addogram.