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Saturday 19 March 2011

After the tsunami - Chaos theory in real life

THINK ASIAN By ANDREW SHENG 

Chaos theory in real life





http://www.youtube.com/watch?v=93OkKykpovw&feature=player_detailpage#t=59s

I was at an IMF conference on capital flows in Bali when the Japanese earthquake and tsunami occurred. As the tragedy unfolded over the weekend, it became clear that the crisis was complicated by nuclear considerations. All of our sympathies and condolences go with our Japanese friends as they go through this terrible natural disaster, possibly larger than the Kobe earthquake.

When the Year of the Rabbit ushered away the Year of the Tiger, there was a false spring in February when financial markets were buoyant as everyone thought recovery was in the air. Even the Nikkei stock market index reached a recent peak. The US economy seemed to be on the upswing as unemployment numbers declined one percentage point. The earthquake shattered that illusion of recovery.

Chaos theory is always introduced by the idea that the flutter of a butterfly's wings can cause a hurricane the other side of the world. We now see Chaos theory in real life. A tsunami in Japan can hit the west coast of the United States, but financial markets immediately reacted around the world, as everyone tried to assess what the largest net foreign asset holder in the world would do. Will the Japanese sell off their foreign assets to finance their own post-earthquake reconstruction? If they do so, will they sell off foreign currencies and buy back yen, which will make the yen stronger?

On the other side of the world, there was another earth-shattering pronouncement, not immediately comprehensible by ordinary investors, but very significant in terms of financial markets.

On Oct 15, 2010, Pimco, the world's largest bond fund manager, with probably US$1 trillion under management, announced that their Total Return Bond fund was cutting their holdings in US Treasuries as a result of quantitative easing. Most retail investors probably did not notice that announcement.

But on March 9 this year, the head of Pimco, Bill Gross, announced that at the end of February 2011, the fund had sold off all its US Treasuries and agency debt. To me, that is as significant as a tsunami in financial markets.

I did not fully digest the significance of that event because I was travelling from Washington DC to Bali. But after I downloaded Gross' comments, available at www.pimco.com, I began to understand his thinking. He showed a fascinating chart on who was and will be holding US Treasuries. In the past, the Federal Reserve only held 10%, foreigners 50% and US institutions and individuals held 40%. Since the beginning of QE2, the Fed has been buying 70% and foreigners are buying 30%, while US institutions are staying on the sidelines.

So why are US funds like Pimco not buying? Part of the reason is that “Treasury yields are perhaps 150 basis points or 1.5% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.”

In other words, the US dollar is violating the second of the three pillars which give it the most-favoured-currency status, according to Barry Eichengreen, professor at University of California at Berkeley, who has a great understanding of the special role of the US dollar from the span of economic history.

On March 2, 2011, Prof Eichengreen wrote an article in the Wall Street Journal arguingL: “Why the Dollar's Reign is Near an End”. The three pillars are firstly, the depth of US dollar-denominated debt securities, secondly, the dollar is the world's safe haven, and thirdly, the dollar benefits from a dearth of alternatives.

Currently, 42.5% of global foreign exchange transactions are conducted in US dollars, compared with 19.5% for the euro, 8.5% for the yen and 6.4% for sterling. This is because commodities like oil and gold are priced in dollars. Moreover, a large chunk of foreign exchange reserves are held in US dollars, the largest being Asian and Opec central banks and sovereign wealth funds.

The preliminary report on foreign holdings of US securities as at the end of June 2010 was published at the end of February 2011 by the US Treasury. Foreign holdings increased US$1 trillion from a year ago to US$10.7 trillion, of which US$2.8 trillion was in equities and the balance in debt securities. Out of the US$10.7 trillion, China held US$1.6 trillion (15%), Japan US$1.393 trillion (13%) and Middle East oil producers US$350bil. So, the real fear of Bill Gross is the question: “Who will buy Treasuries when the Fed doesn't?”

More important, what happens if the foreigners decide like Pimco not to buy any more Treasuries, especially when they decide to bring their money home for their own domestic purposes?

Consequently, we are even closer to the edge of higher currency volatility than what the market is telling us. One of the big lessons of the recent past is that the price of money and risk spreads (and credit rating agencies) have not warned investors of the inherent risks in financial securities.

With QE2 and near-zero interest rates in the major reserve currencies, the spreads simply do not reflect the inherent risks that I have outlined above. This means that sooner or later there will be a spike in the price, or a sharp fall in value, if history is any lesson to go by.

Indeed, I have argued that even though the Dow Jones Industrial Average has doubled since the beginning of QE2 in 2008, if you deflate the index by the price of gold, the equity market has crashed already.

I would be the first one to hope that the current economic recovery in the United States and Europe will be sustainable. I strongly hope that Japan will recover quickly from this sudden shock and tragedy. But I would not be responsible if I did not think that the financial markets are once again not reflecting the risks out there. Just like Bill Gross, it is legitimate to ask “whether Quantitative Easing policies actually heal, as opposed to cover up, symptoms of an unhealthy economy.”

Watch this space.

Andrew Sheng is the author of the book “From Asian to Global Financial Crisis”.

1 comment:

  1. In another twist, the secrets in Japan’s nuclear plants revealed: materials there can produce nuclear weapons anytime, reasons for disallowing helps from US, China ..

    日本核電廠背後的秘密

    日本人對於核電廠的消息並不透明. 一開始美國主動說要給泠卻劑, 日本卻拒絕了…..
    這麼嚴重的事情, 為甚麼爭分奪秒, 不派大量人力去救核電廠,只有幾十個工作
    人員及其他的自衛隊, 為甚麼不一開始用硼酸, 要用海水…… 許多人都猜核電廠有不想別人知道的秘密..
    為甚麼美國的航母要調頭?他們的直升機在約一百公里外接觸到的放射物包含了甚麼? 如電影般的情節,背後隱藏了…
    最要命的是,日本人採取了燃料,不是大家通用的鈾,而是鈾和鈈混合體。這樣做,經濟上非常不划算,安全上也不好。唯一的用處,就是燃燒過後的廢料,就是提純的
    鈈,可以用來製造原子彈。
    其實這也是日本一直滅而不宣的“和平核能”政策,就是通過所謂和平的利用核能,日本名正言順地生產和儲存了可以製造幾千顆原子彈的鈈,再加上日本的技術,可以快
    速地安裝原子彈,用來制衡它認為有威脅的國家。

    日本37萬平方公里,卻變態地修建了57個核電站,發出的電不到全國需求的30%,一個核電站有4-6個反應堆,即全國有三百多個反應堆。37萬*30%=11萬平方公里,即三
    百多個反應堆為11萬平方公里供電
    110000/300=367平方公里

    也就是說,日本的一個核反應爐只為367平方公里提供電力。相當於每個縣級城市就要配一個核反應爐。這TMD正常嗎?
    (Embedded image moved to file: pic02168.gif)

    事實上,作為一個島國,日本有著豐富的潮汐和風力發電資源,同時太陽能也非常先進,但該國對這些視若無物,多年來,全力發展核電。

    如果這僅僅是電力需要也就罷了,但是,有多少人知道?在核電技術已經突飛猛進的今天,日本的核電設施卻一律死抱著第一二代技術不放。

    福島核電站採用的是鈾鈈混合氧化物這種比鈾氧原料貴2-3倍,而且危險性高的原料,反應堆用的也是安全性差的快增殖反應堆,而且沸水堆只有一回路,直通渦輪。
    日本人玩這種手段只要有點腦子的都看得出來他們想要幹什麼:不就是為了儲備製造核彈的那點鈈嘛。

    現在據報導爆掉的一號堆已經在用硼酸了。一開始不肯用是因為一旦用了硼酸,裏面的核燃料就全部報廢了。福島電站用的可是MOX燃料,那可是極重要的戰略資
    源,你們懂的。

    現在國際上最新一代的核反應爐是號稱出事故緊急停堆後36小時無人看護照樣安全的。但日本人就是不用。簡單地講,它們只造最原始最落後的核電站,絕不採用新
    技術,哪怕是新技術再成熟,再免費。

    因為原始的一二代技術最有利於大量提煉核原料。最浪費,最低能,最高消耗,最大成本,最不安全,只為換得核原料。
    這場核災難到底會發展到多大,至少還有三個問題沒公開,離了這三個問題,誰也無法預測,只有日本心裏清楚。

    第一個問題:它們造出來的四千枚核彈的原料存放在哪里?是否安全?!

    第二個問題:在這些核電站裏,到底還有什麼秘密,這些以製造核彈原料為目的的核電站裏,都有哪些高危和不可告人的東西?!

    第三個問題:日本這些年積攢的核廢料都放在哪里?在陸地上?還是在海裏?還是偷運到哪里去了?會不會產生危害?

    這些問題都是潛在的核彈級風險。是對全人類的安全威脅!

    可以看出曰本的野心,他的堆居然是鈾鈈堆,而不是普通的二氧化鈾堆,看來造核彈就在他們掌握中。他們這盤棋很大啊。鈾鈈堆是什麼呢?簡單地說,鈈也可以做核 彈,往長崎廣島投的彈就是鈈彈。他們不
    用二氧化鈾做燃料芯塊,而是用鈾鈈合金,這就很說明問題。

    一切似乎冥冥中注定著,如果日本繼續製造核武器,他們將會用這些武器做些甚麼呢?沒有一個島國如日本般,不主力發展潮汐與太陽能,卻不斷地發展核電,用那些
    核廢料生產出能夠製造出原子彈的鈈。如果不是日本的核爆事件,日本將30%的全國用核能用電比例,再繼續擴大,再建多些核電廠,中國以及其他國家又再繼續建核電
    廠,朝鮮、伊朗繼續用他們那不成熟的技術去製造核武….. 世界未來將會怎樣?
    一場海嘯,猶如潘朵拉的盒子,將日本的核武器計劃掀了開來,某方面也算救了日本人,還有我們。大部分日本人仍是善良的,他們也是無辜及不知情的,問題在於政
    治被日本右翼所掌握住。甚麼都敢講的石原慎太郎,也是在遭遇到切身之痛後,才明白到他們究竟做了些甚麼。將靈魂賣給了魔鬼,卻被那隻魔鬼反噬。

    無論怎樣,希望世界和平,這個世界少些天災與人禍。

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