Oct 16, 2004

Getting Started

I am starting this blog, to record my thoughts on the global financial markets and to see if the world has any interest in them and to receive feedback on my thoughts from readers.

Today's news
This morning the news is about India's possible change in foreign reserve policy. India has $120 bn in foreign reserves, most of which is invested in US Treasury bills, and is considering investing them in domestic infrastructure projects instead. This makes good sense in theory because definite need in India for infrastructure improvements (roads!) and the dramatically lower return on investing in the US compared to India. Whether this is good or bad for India will be determined by the specifics of the spending but it is significant to the markets because of the similarities between India, China, and Japan. Since the start of 2002 China and Japan have purchased a combined $240 bn of USD assets while Chinese and Japanese foreign currency reserves total $450 bn and $650 bn respectively.

Will it matter?
If China were to change its reserve policy financial markets would certainly react but right now all we have is India considering changes. My opinion is that it will probably make the dollar trade down against the Yen and the Euro. Not an earth shattering call in here but it is really more an issue of timing than direction. The dollar was already down a bit yesterday and Monday should continue the move. This should also benefit gold and other precious metals but personally I would wait a few days to see if last week's weakness reappears. I also plan to watch Caterpillar (CAT:NYSE) closely in here as it has a bullish chart, a CEO who has "never seen such a strong economy", and the possibility of a ramp up in Asian infrastructure building. China probably has more need of roads than India if they were to follow suit.

Not the end of the world.
Contrary to popular opinion I am not so sure that the repatriation of Chinese or Japanese funds will cause any sort of financial collapse. A strong argument could be made that this repatriation is what the Federal Reserve and US gov't were hoping for by letting the dollar depreciate. Such a policy change would mean that the US consumer is no longer the growth engine of the world and that the US could then be pulled out of its jobless recovery by exporting goods to Asia. Probably some short-term adjusting to be done but I don't think it leads to an inflationary spiral for the US or the world.

Bullish or bearish?
As the above comments reveal, I am leaning a bit bullish on US equities in here. A change in Indian reserve policy would be the second major "bearish" occurrence in two weeks (the first is the FNM restructuring). I believe this Indian policy change (if it actually occurs) will pass relatively quietly and if China should follow suit in 6 months that will be accepted too. The passing of these events without massive US inflation or deflation can only be interpreted as bullish. Obviously I am looking ahead here and am still very open to changing my mind (say if the yen trades below 103/$ in the next month) but to me the global imbalances are showing signs of correcting in an orderly fashion.

Thanks to Google for hosting this and to anyone who takes the time to read my first post.

BTW, I have no positions in any assets mentioned in this post.


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