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The Fed's Monetary Policy is About to Run Into a BRIC Wall
Over the
last few months I’ve noted repeatedly that THE key issue for the financial
markets is the ongoing tension building between the Fed’s pro-inflation policy
and China’s anti-inflation policy.
That tension
just kicked it up a notch.
Over the
weekend China hiked interest rates 0.25%. This was the second interest rate
hike in three months (the first was on October 19, 2010). And it sends a clear
message that China is taking action to cool its monetary system after consumer
prices rose 5.1% in November.
China’s not
the only one. Both Russia and Brazil have recently entered into the
“anti-inflation fray” as the below stories attest:
Russia, worried by inflation, hikes deposit
rates
Russia's
central bank raised interest rates on its deposit operations on Friday to
contain surging inflation, its first step away from the loose policy
implemented after the financial crisis hammered the Russian economy.
The
bank lifted its deposit rates by 25 basis points but left the cost of lending
operations -- including the benchmark refinancing rate -- unchanged, saying a
narrower corridor between the cost of various instruments would increase the
effectiveness of its interest rate policy.
Brazil Bank Signals Rate Rise Is Near
Brazil's
central bank caught markets somewhat by surprise Wednesday with an unusually
clear commitment to raise interest rates soon, as the outlook for inflation has
become "far less favorable" than it had previously thought.
Brazil
joins other emerging countries, including China, that are taking steps to cool
their economies, for fear of overheating. Earlier this month, China said it
will shift to a "prudent" monetary policy next year, amid growing
concern in Beijing about inflation and excessive liquidity fueled partly by
loose monetary policies in other countries.
In plain
terms, our esteemed Fed Chairman Ben Bernanke is about to find his policies
running face first into a BRIC wall. He’s been exporting inflation abroad to
the emerging markets all the while claiming it doesn’t exist. With growing
civil unrest due to soaring food and energy prices the emerging markets are now
fighting back.
On that
note, China and Russia have already cut their US Treasury holdings by 3% and 9%
respectively year over year.
These may
not seem like a HUGE drop, but when you consider that both countries are
aggressively loading up on Gold and other natural resources at the same time,
and we may be at the beginning of a potential seismic shift away from US debt
for foreign central banks.
Good Investing!
Graham Summers
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Like all fools' gold stories, there are some financial virgins who are receiving gushes of hot money. They thank the BRICs for not receiving the money flow and diverting to them by default. These virginal (of the arse type) economies are tight. Combined, they are much smaller than the BRICs'. Inflation is rife. Currencies are riding high. The hot money is going to tear them up. When the hot flow reverses, they will be left hanging high and dry. They think they are in luck. They are in heat!
Don't know about BRI, but China's ability to fight inflation by allowing the yuan to rise is well within its control. Look for at least a 4-6% increase against the dollar in 2011.
Is the already EMU anticipating importing inflation from China by sending up trial balloons that it won't be particularly concerned about "exogenous" sources of inflation?
I am gonna hafta call a top here in emerging markets guys. Food inflation hurts the third world who spends at least twice their percent of income as us civilized and more genteel societies. Its about time they quit parasitizing off us with mercantilist policies. This is going to teach them darkies and yellowies a lesson. Its our fiat but their problem.
Good call, IMO. Hadn't looked too close till now, but ES starts outperforming EEM Dec 2, and the Dow passes it on Dec 14. Granted, it's the f***ing POMO, but still...
Let's see if we have this right. China increase interest rates to 5.81%. China's OFFICIAL inflation rate is 5.1%, so presumably it's actual rate is higher.
Using the offical inflation rate, that means real interest rates are 0.7% in an economy where GDP grew 9.6% in 3Q. And they think real rates of 0.7% will slow inflation with that kind of growth? Good luck with that. By taking the Greenspan incrementalist approach to raising rates they risk letting inflation spiral out of control.
You are correct. The chinese have no intention of killing either real or nominal growth. They must make it to first world status in twenty years or revolution. They will make only symbolic moves and hope that they make it to first world status before their financial system is destroyed. they believe in the phisical economy and are willing to risk destroying their financial economy once the physical capital base is as large as possible. After all in a command economy they can just command a new color for the new fiat and move on. Whydo youthink they are encouraging gold and silver hoarding? The communist party will not survive the first real recession. When you find that you are riding a tiger it is important that you not dismount.
The 'brick wall' has been mentioned so many times, and have been found wanting, mere painted sponges. But when it does hit it will be a surprise.
As Dollar weakening, 1st topic of CNBC in 1st week of 2011 will be 'Spain Debt Crisis'.
also, Given that hot money is fleeing towards precious metals, the only way that the Fed can quell this run is to raise interest rates. Anyway way you look at it short term rates will be forced higher next year and the dollar (tangible cash) will be king given that future dollars will be scarce. The powers that be continue to create debt (money we don't have) to maintain status quo and all it does is make the debt problem worse.
The story to be told is will the markets allow the Fed to monetize all the debt. I think not and it argues for cash to be king. Sharply rising interest rates will break a lot of markets.
Not only do you directly contradict yourself with those statements, but trash fiat push-button faux-money has NEVER been "king" --- never. Real money can be king --- in fact, always IS king --- but cotton-linen green dead presidents are only a cheap and pale imitation of the real thing.
Check out the board of the Fed - I dont think there are many representatives of the "masses" on that board!
Maybe this time the Fed will be forced by market conditions to RAISE rates. With a huge debt that needs to be financed, it is pretty clear that upward pressure on the LONG end will force Fed to change its policy. Most of the lending to the masses is based on rates at the long end and its only the banks that benefit the most from the ZIRP
BRICS are just one giant property bubble - particularly the IC part. Rinky dinky 25 bp hikes is not going to accomplish anything. Serious hikes that men business will collapse the property bubble and investment bubble. Dont forget investment is 50% of GDP in China. So... a serious attempt to combat inflation could very well push china into a hard landing. This will have the salubrious effect of reducing oil and commodity prices - which might help the US economy.