Global Strategy: Is the 'Store of Value' Threatened Only by Inflation?

Excerpts from Dr. Enzio von Pfeil's October 13, 2009, appearance on CNBC Asia:

Asia markets outlook

• My broad theme is “downward earnings surprises”
• By this I mean that hitherto, earnings have been managed via cost-cutting and accounting tricks.
• But there are no more rabbits to pull out of the hat
• So the third quarter earnings season in America will not be as dazzling as the last two quarters’
• Given the interconnectedness of market sentiment, this suggests that Asian markets will start faltering this month

1. As an aside, October is traditionally a “crash” month, and I see a mild one coming. First, due to earnings disappointments rubbing in the reality of the worsening Economic Time, and second because Beijing could well pull-off some knee jerk policy switch which surprises all.
2. The nature of chaos is that its roots are inexplicable – except to Monday morning quarterbacks…

With BOJ meeting this week, could you give us some commentary on what you expect from them? Will they keep rates the same or raise them?

• They will leave rates on hold for a long time – if for no other reason than that they do not want to drive the yen up even more
• The usual “it takes time” sing-song will prevail
• My view is that Japan is infected with “karaoke politics” whereby now the new guys are shoved in front of the microphone and will start singing the same sing-alongs that everyone knows

1. one such sing-along is that the bureaucrats will continue ruling Japan
2. another will be that “it takes time”
3. a third will be that we must be patient and wait for the world economy to recover

• the simple fact is that Japan is a communist country festooned with capitalist emblems and a worrying budget deficit which, in typical Japanese fashion, is not being addressed

Do you think inflation is currently a worry?

• Absolutely not
• The Economic Clock suggests that the global Economic Time is characterized by an:

1. excess supply of goods, and an
2. excess demand for money (in the sense that banks won’t lend)

• This suggests that unemployment has to rise and then stay stuck on a plateau
• These lacking “green shoots” suggest that “demand pull” inflation will simply not be a concern
• This, in turn, suggests that Central Banks in the major economies won’t tighten

Any other topics you would like to discuss?

• Gold: keep buying

1. the dollar will keep sinking on account of America’s widening budget deficit, and
2. because of a sinking dollar, people will seek a store of non-dollar value, e.g. gold (even if it is dollar-denominated)

• Store of value: people myopically define it solely as an inflationary phenomenon: inflation “eats away” the value of something. But there is another store of value: perceived bankruptcy, and this is what the U.S. Federal government debt is about.