Russell Napier writes Events in Turkey will send the USD ever higher, as EMs seek to repay their foreign currency debt and scramble to buy the USD to do so. In a very strong USD world the weakness of the RMB will be revealed as not just a temporary, perhaps cyclical, phenomenon but as the structural change that augurs a new global monetary system. As suggested in the last Fortnightly, investors should watch commodity prices in general and copper prices in particular to assess whether the net impact from the untethering of the RMB from the USD is reflationary or deflationary.
Clearly in a world of growing EM default/repudiation and lower EM growth, China will have to pull the monetary levers even more dramatically if it is to reflate the world. China’s move looks increasingly like it has come too late to take the world smoothly to the much higher inflation that is necessary to reduce the world’s excessive debt burdens. For a time at least, repudiation and not inflation will dominate the outlook for investors, particularly those in emerging markets.
For the past few years your analyst has focused on the structural changes to the global monetary system and warned that a focus on cyclical forces alone is an increasingly dangerous sport. As events in Turkey play out at a time of still incredibly low, developed-world interest rates, it is time to ask again how wise it is to pursue the returns of a normal cycle as the foundations of the global monetary system are shifting under your feet.
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