Please, click here to read this article in pdf format: december-9-2009
To the risk of sounding like a broken record, let me repeat that back on September 2nd, I wrote that:

“…emerging markets are the Achilles’ tendon… We can perfectly see a G-8 central bank coordinate assistance with another G-8 member, but investors are wondering who is going to pay the bill, if a fiscal problem unfolds in an emerging market. The IMF? Maybe, but given that history suggests otherwise, the onus is on policy makers…” (www.sibileau.com/martin/2009/09/02 ).

And that on September 3rd, I suggested that:

“…A run against an emerging market’s currency would not necessarily be supportive of the USD, if the same is triggered by a wave of defaults affecting the country’s financial system. It could potentially be supportive of gold, if the big guys (G-8 countries) don’t lend a timely hand…” (www.sibileau.com/martin/2009/09/03 ).

Yesterday’s panic on the health of emerging markets should force us to reconsider the problem at hand, at a higher level. Thus, let’s gain some perspective here. Let’s not drown in a glass of water. Europe will not risk its monetary union on the fiscal situation out of Greece or Portugal. In fact, is this any surprise? Has it not been decades since these, now so-called “peripheral” countries, have been running debt sustainability problems? Certainly, downgrades affect investment flows in the short term, but my view here is that it will only be temporal. On the same note, does anyone doubt that institutions affected by the Dubai restructuring will not have access to liquidity lines, if needed? The 2009 story was all about injecting liquidity to avoid another depression, and it worked. If it worked, there will be more of it in 2010, if needed.

The existing monetary policies were first proposed by Keynes, who wrote the following on the same:

“…when output has increased and prices have risen, the effect of this on liquidity-preference will be to increase the quantity of money necessary to maintain a given rate of interest…” (General Theory, Chapter 13, Section III)

I am convinced that when this whole exercise in monetary policy is over, we will need a much larger quantity of money to maintain back-to-normal interest rates. How do we get there? Bernanke himself reminds us of the road chosen every week: Maintaining rates at a low level for an “extended period”. I see no reason to not take Ben’s word at par here.

In conclusion, I will go on record here saying that when this confusion triggered by concerns on the future of “peripherals” as well as end-of-year technicals disappears, we will look upon these days as a time of opportunity. When will the confusion bottom out and disappear? I have no clue. It will vanish when it will vanish. Sometimes, it is best to leave things as simple as that.

Lastly, should the world collectively coordinate a 2010 of low rates to thwart prospective liquidations in emerging (and perhaps not-so-emerging markets too), gold will underperform, if our Thesis No.2 is not refuted.

Martin Sibileau