Tags: hans | parisis | dollar | us | economy | insecurity

Global Insecurity May Force Safety Seekers to Dollar

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Thursday, 24 Feb 2011 01:49 PM Current | Bio | Archive

Insecurity continues to dominate the globe.

The Wall Street Journal reports: “The government of Col. Moammar Gadhafi hasn't destroyed significant stockpiles of mustard gas and other chemical-weapons agents, raising fears in Washington about what could happen to them — and whether they may be used — as Libya slides further into chaos."

The Journal continued: "When you have a guy who's as irrational as Gadhafi with some serious weapons at his disposal, it's always a concern. But we haven't yet seen him move to use any kind of mustard gas or chemical weapon. The program to eradicate Libya's chemical agents, as well as its chemical weapons production facility, was delayed by spats between Washington and Tripoli over funding and logistics … one would certainly feel more secure if all of the mustard gas had been eliminated.”

Meanwhile, Dow Jones reports that al-Qaida has pledged its full support for the protesters in Libya.

When I compare today with 2008, I see worrisome warning signals developing when I look at commodity and equity prices.

In 2008, equity markets crumbled in a spectacular fashion in the face of comparable price pressures. Gold lost somewhere in the region of 30 percent of its value in less than half a year while the dollar staged a robust rally, which matches with much of what happened in 1973.

By the way, it also could be interesting also to take notice that with silver above its January 3 high, oil at more than $100, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) in euroland still in de facto bankruptcy, sexual scandal in the government of a major European power (Italy), revolution(s) sweeping through the Arab world and upheaval marching upon major U.S. state capitals, gold has not vaulted to a new high yet.

What strikes me is the performances of the Swiss franc and the Shanghai Composite in China. In late 2007, weakness emerged in the Shanghai Composite, which was about nine months before the oil price reversed its upward course that coincided with the starting point of the crisis while the Swiss franc started in that same period strengthening on its own.

For now at least, it looks like these two indicators, the Shanghai Composite index and the Swiss franc, are behaving in a similar fashion over the past few months. We also see the Chinese index following an amazing similar path to that of 2008 and the Swiss franc has come, especially against the euro, under renewed pressure.

Also, and this is a factor most investors have already forgotten, in 2008 we witnessed a powerful reversal in the price of a number of basic foodstuffs well before oil prices peaked in July 2008. After having peaked in February 2008, wheat futures staged a sharp reversal. When the oil price and, about a week later, the dollar changed course in mid-July 2008, wheat was down over 30 percent.

Investors could do well by paying attention because the reason why these reversals occurred was because we saw a dramatic reduction in global inflationary pressures and because of that we saw investors turn from seeking out the currencies with the most hawkish central banks to, instead, favoring those with the most growth oriented monetary policy stance, which favored the dollar over the next nine months.

So, most investors will ask why what happened in 2008 matter now at a moment that the majority is worried about inflation? The simple answer is that wheat prices have reversed dramatically over the course of the last 10 trading sessions.

Since Feb. 14, which is coincidently the point at which the situation in Libya began to deteriorate, front month futures have lost a substantial 13 percent. Tellingly, over the same period we have seen a 17 percent rise in front month NYMEX crude prices and a 7 percent rise in Brent crude prices. If you ask me, this seems to me at least as worrisome to what happened in 2008.

I certainly can be wrong and I’m certainly not arguing that 2011 is on its way to become a carbon copy of 2008. It’s a fact that today investor concerns center around geopolitical uncertainty which was not the case in 2008. Nevertheless, we cannot deny that a similar (to 2008) set of warning signals are starting to emerge from a variety of different markets.

While all this may tell us very little about what should happen right now, it is worth remembering that the dollar continued to fall all the way through until July 2008, which was a full five months after wheat prices reversed their upward course.

Today’s signals only add to my view that this year we should see substantial demand for safe-haven assets and that the dollar is likely to be one of them, notwithstanding its dubious situation it is in right now.

Be sure you can count on me as I will continue looking for signals that will either confirm or refute my view. It won’t be boring times, that’s for sure.

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HansParisis
Insecurity continues to dominate the globe. The Wall Street Journal reports: The government of Col. Moammar Gadhafi hasn't destroyed significant stockpiles of mustard gas and other chemical-weapons agents, raising fears in Washington about what could happen to them and...
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2011-49-24
Thursday, 24 Feb 2011 01:49 PM
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