Friday, February 27, 2009

Eye on the Ball

With all the words this week about stimulus packages, multitrillion dollar "budgets" and the beginning of a political donnybrook in congress in coming months it is easy to get lost. Cutting through the clutter makes decisions about investment easier. Listening to politicians has never been terribly profitable. At least not as profitable as talking to them and filling there wallets.

Last week the Chinese spent an enormous amount of money. We may be jaded about billions of dollars lately, but a billion is still a lot of money. That is, until inflation sets in. Last week the Chinese spent 10 Billion on Brazilian oil, 25 billion on Russian oil, and 22 billion on australian minerals. What does it tell us?

The week before, the chinese ministry of finance said about the US economic policies, "We hate you." Pretty clear statement that meant, "we are tied at the hip with you and your policies. If the US dollar drops in value, our two trillion dollar reserves go down in value as well. If we stop buying US treasury bonds, the global wheels fall off. Don't fret, we're going to buy your damn debt issues, even if the ink is still wet. We'll discuss terms later!"

The dollar is strong at the moment. The Chinese have a boatload of them and likely to need more to help finance the US debacle. "We better spend some of this monopoly money" Looks like they will be effectively trying to exchange clownbucks for something tangible like oil and iron ore.

We still have a short term deflationary pressure. Never fear, there will be trillions of new bucks coming down the pike soon enough. Enough to unlock credit, enough to make foregoing purchases a wrong behaviour, enough to put upward pressure on US interest rates. But there will be opposite pressure to keep rates competitive and the dollar weaker to encourage exports from a consumer sated domestic economy.

Buy umbrellas (and glittery metals) when the sun shines.

John Barnyak