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Jumat, 12 Agustus 2011

Roman empire _CLSA

All focus was on the FOMC statement yesterday. To be exact, the economy

“Considerably slower than the Committee had expected” - the economy suck!!
“Indicators suggest deterioration in overall labor market conditions in recent months” - Job creation is key focus of Bernanke
“Downside risks to the economic outlook have increased…” - excuse to print more? you bet
“The Committee also anticipates that inflation will settle, over coming quarters” - No inflation means can print more money, yep.
“Subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013…” - why mid 2013, not even 2012 yet. Must be bad
“Will maintain its existing policy of reinvesting principal payments from its securities holdings…” - extension of QE2?

Although the Fed did not make explicit reference to QE3 (As expected). A commitment to leave rates unchanged ‘till 2013 is a powerful easing message irrespective of what the Fed’s balance sheet is doing.

There is no doubt that QE3 is not a IF, but a WHEN. For those who are unsure, it might be good idea to a copy of the book Tomorrow’s Gold (CLSA publication with Marc Faber). Afterall, view on inflation or deflation should be key to ones investment process.

Faber put many examples of where countries that became rich and powerful inevitably grew arrogant, overconfident and complacent, and they tend to overspend. That all the great empires experienced, overtime, accelerating inflation, rising interest rates and a sharp depreciation of their currency.

“With the rise of Rome’s population and its insatiable appetite for luxury goods, the heart of the empire became the world’s biggest consumer market (comparable, to some extent, to modern day America). It also had a huge trade deficit, which eventually led to hyperinflation, currency depreciation, decay and loss of power.”

Back in day of the Roman Empire, there was no money printing press. But instead the Romans increased the supply of money by debasing the denarius (silver coins) which went from 94% silver content to eventually only 0.02%. As one can imagine led to hyperinflation in the end.

Enough said from history lessons. To deal with what is front of us now, we hosted a conf call with Chris Wood y’day.

30 second summary: Maintain long gold, continue to short EU banks and long German / French CDS. Expecting short-term up-move in risk assets depending upon QE3 format but until then $ could strengthen and commodities could weaken. (let me know if you want the two minute long summary).

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