Fall Of The House Of Money: Artemis Capital On How €entral Banking Took Over Capital Markets... And The World

Tyler Durden's picture

One of the long-term recurring themes both here and in other more objective media, has been the encroaching domination of the central planning regime, or monetary authorities, read central banks, in the domain of capital markets and overall broad sovereignty, to the point where there is neither technical nor fundamental analysis left, but merely the question of where is the next batch of excess liquidity going to come from. Welcome to the death throes of the fiat system. Artemis Capital has released an extended must read presentation that summarizes just how global changes in trade, currency exchange, global monetary excess liquidity in recent decades, and especially in the coming future, will increasingly determine and define risk, and more troubling, the centuries old anarchism of state sovereignty. Anarchism, because as Europe has demonstrated so very well, in the current world the only real actors are the central banks. And with each passing day they become ever more powerful players in the global capital markets arena, as confirmed by correlations that rise every higher, approaching 1.000 across all asset classes. Anyone wondering why the only fulcrum variable for the future of risk will be FX exchange rates, and why any and all wars in the future will be primarily in binary "currency" format, we urge a careful reading of the attached slideshow by Artemis Capital titled "Fall of the House Of Money: Changes in Global Trade and Currency Exchange."

None of this will come as a surprise to regular readers, but some of the concepts bear repeating.

Artemis' Chris Cole starts with the premise of "World War €urrency"

Countries are artificially devaluing their currencies to generate competitive trade advantages or to finance deficits

United States

  • Ultra-loose monetary policy (ZIRP & Quantitative Easing)
  • Massive government deficits and high debt levels
  • Unsustainable fiscal spending and entitlements

Japan

  • ZIRP and debt-GDP-ratios above 200%+
  • Japanese government intervened in foreign exchange markets for the 4th time in over a year (selling yen and buying dollars & euros)

China

  • Yuan is pegged to the dollar and estimated to be as much as 40% undervalued against the US dollar
  • China keeps buying dollars and “printing” Yuan to maintain this peg

Switzerland

  • Swiss Franc was a popular safe haven appreciating +28% against the Euro and +50% against the dollar since 2003
  • SNB devalued Franc in September pegging it at 1.20x to the Euro

Brazil

  • Central bank cuts interest rates twice in the last quarter despite highest inflation in six years

At its core, the primary source of tension, volatility and margina price influence is the relationship between the developed (debtor) and emerging (Creditor) nation.

What this underlying dynamic results in is a world in which asset prices are driven not by economic fundamentals but by the "Carry Trade" - i.e. who has the most and cheapest capital/liquidity.

The liquidity generated by the debtor nations, and which drives the above Risk ___ dynamics, has had another ominous side-effect: sending all correlations to all time record highs.

Doubt the carry trade is the stock market? Don't.

Naturally, the next point of debat is an observation of the biggest transgressor of all: the United States, and its central bank, whose sole purpose for its existence, has been to slowly devalue the dollar thus creating stealth inflation, and inflating the debt which not only in America, but across the entire developed world is now at an all time high. Alas, with ZIRP in place, and negative rates impossible, the only other option is to print ever more.

Nothing new there.

Yet the question remains: can currency devaluation be the basis of economic growth? The answer: it can create the illusion of economic growth... and that's it.

Even more stark is the following chart: it shows the S&P adjusted for the dollar's value destruction: seen this way the S&P is comparable to levels seen back in 1997! But because nobody considers the fact that all stock profits are paid out in dollars, and the dollar has lost so much purchasing power ever since the great moderation, instead gauging everything in nominal values, it is obvious that the Fed's plan continues to work.

So what is the conclusion:

  1. Global currency regime will face significant changes in the ensuing decade
  2. Self-reinforcing cycle between Debtor-Developed and Emerging-Creditor nations likely to unravel – perhaps violently
  3. European crisis may tip us into a second global recession
  4. Global policy makers are out of stimulus options
  5. Dollar hegemony may be challenged in the future

And some advice from Artemis:

  1. Prepare your business for the potential of a second global recession
  2. USD is historically strong when the economy is weak – watch for reversal
  3. Evaluate portfolio returns against a global basket of currencies and commodities
  4. Diversify exposure during periods of dollar strength and deleveraging :
    1. Nations with healthy finances and commodity driven economies (e.g. Canadian Dollar, Norwegian Krone, Australian Dollar)
    2. Tangible assets like real estate and metals (but not on leverage)
    3. Alternative asset classes (e.g. volatility and managed futures)

Full presentation: