Delaying Surgery
http://www.morganstanley.com/GEFdata/digests/20060106-fri.html#anchor0
Reversals are possible on three fronts -- the liquidity cycle, the US property market, or the dollar.
We finished 2005 with a link to Steve Roach and will start 2006 the same way. Obviously it gets a little quiet over the festive period and we all have more important things to do. Of interest is certainly the continued strength in the price of gold. The most likely explanation appears to be petrodollars that are being recycled out of USD into bullion. Clearly someone has decided not to hold US dollars, and for good reason. The US budget and trade deficits continue to expand with apparently scant concern for their impact, or management.
China and Japan are caught in a "damned if I do, damned if I don't" scenario. If they decide not to continue to increase their holdings of US dollar denominated assets, ie Treasuries, they will induce the long expected collapse of the US dollar. This will inevitably lead in short term to higher US interest rates, falling asset prices, and an associated recession. By continuing to increase their holdings they buy time, but only in the sense that a cancer patient buys time by delaying critical surgery.
Again, it promises to be a very interesting year.
Reversals are possible on three fronts -- the liquidity cycle, the US property market, or the dollar.
We finished 2005 with a link to Steve Roach and will start 2006 the same way. Obviously it gets a little quiet over the festive period and we all have more important things to do. Of interest is certainly the continued strength in the price of gold. The most likely explanation appears to be petrodollars that are being recycled out of USD into bullion. Clearly someone has decided not to hold US dollars, and for good reason. The US budget and trade deficits continue to expand with apparently scant concern for their impact, or management.
China and Japan are caught in a "damned if I do, damned if I don't" scenario. If they decide not to continue to increase their holdings of US dollar denominated assets, ie Treasuries, they will induce the long expected collapse of the US dollar. This will inevitably lead in short term to higher US interest rates, falling asset prices, and an associated recession. By continuing to increase their holdings they buy time, but only in the sense that a cancer patient buys time by delaying critical surgery.
Again, it promises to be a very interesting year.
posted by Peter at 9:34 am
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