A TALE OF TWO MORE COUNTRIES

6/4/09

This morning’s Wall Street Journal reported that Mr. Najib Abdul Razak, who is both prime minister and finance minister of Asian Tiger Malaysia, has been discussing with Chinese authorities the possibility of conducting trade between these two countries in the Chinese yuan and in the Malaysian ringgit rather than in the dollar, currently the currency in which Malaysian-Chinese, and most world, trade is transacted. These two Far Eastern economic giants are considering this titanic move because both Mr. Najib and his Chinese colleagues are concerned about the debasement of our currency that constitutes the Bush/Obama financial/dollar policy. As Mr. Najib put it:

“What worries us is that the (U.S. budget) deficit is being financed by printing more money. That is what is happening. The Treasury of the United States is printing more notes.”

Mr. Najib is either factually wrong in that last sentence or is very cleverly pointing out that he knows who is really in charge of monetary policy of the United States. I’m betting on the latter. (Perhaps Mr. Najib has been speaking with Angela Merkel; see yesterday’s post “A TALE OF TWO COUNTRIES.”) But even if the former is true, the substance of his comment is absolutely correct: we are turbocharging our printing presses over here to the detriment of a lot of parties, perhaps especially to those long a lot of debt denominated in dollars, like the Malaysians and the Chinese.

American “experts” (Presumably, we are talking about experts in monetary and currency policy, not experts in the latest lurid, or just outright inane, exploits of the stars of, say, “Sex in the City,” “Desperate Housewives,” or “American Idol,” generally the type of expertise normally associated with present day Americans.) dismiss the notion of a serious threat to the dollar’s position as the global benchmark for trade. These experts point out that, right now, it is difficult to trade yuan outside of China. This is true, but please note the words “right now,” especially the word “right.”

Three thoughts come to mind:

First, the attitude displayed by the aforementioned American “experts” reminds me of a story my neighbor recently told me. This story is sufficiently long lived and popular that most of you have probably heard it in some form or another, especially if you have attended business school, or even taken a business class, in the last, oh, thirty years or so. It is sometimes dismissed as apocryphal, but it is not.

It seems that my neighbor’s dad was working at one of the Big 3 car companies back in the late ‘60s and early ‘70s. At that time, visitors from Japan would occasionally visit automobile assembly and other manufacturing plants of the Big 3. These visitors would act like the stereotypical Japanese, taking endless pictures and asking many, and very good, questions. The guys working at the plants, both on the line and in the offices, were, out of earshot, dismissive, if not outright derisive, toward their visitors. They were Japanese, foreigners, after all. What did they know? They made junky cars and would never catch up to us in manufacturing capability. We all know the rest of the story, and the currency “experts” are taking the same attitude toward challenges to the dollar that those car guys of yore took toward challenges to our car industry.

Second, the U.S. Treasury and the Fed ought to thank the good Lord each night for the emergence of the euro. Given the post-war German attitude toward monetary policy, and the recent comments of Chancellor Angela Merkel and monetary authorities in Germany (Again, see yesterday’s post “A TALE OF TWO COUNTRIES.”), the dollar might have a very serious challenger for international currency benchmark if the deutschemark were still alive today. (Yes, I know, I know; Germany is too small, it’s too socialistic, it’s too dependent on us for defense. The euro might “some day” be a serious competitor, but the deutschemark never stood a chance…just like that goofy sounding company, what’s its name? TYE OH DUH, or something strange like that.) However, this competitor’s having left the building does not mean a new, potentially stronger, challenger will not arise, and do so very soon.

Third, while the Pontificator was not designed, and was never intended, to make specific investment recommendations, I have liked gold for a while now, as I have liked oil. (See my 6/3/09 post, “…UP FROM THE GROUND COME A BUBBLIN’ CRUDE…”, written when USO was at $27.96; USO is $37.69 as I write this.) I seem to like gold more every day, and especially on those days when Obsequious Ben Bernanke and/or Preppy Timmy Geithner opine on financial/monetary policy, and most especially when those “experts’” thoughts are easily contrasted with roughly contemporaneous ruminations from adults like Ms. Merkel or Mr. Najib. I have been manifesting this enthusiasm for gold by buying the ETF symbol GLD and relatively long (as late as January, 2010 and looking to go out longer) call options thereon. I manifest my continuing enthusiasm for oil by buying call options on the ETF symbol USO; buying USO itself results in having to delay filing one’s taxes, and potential tax complications, while one waits for a K-1 from USO, since USO is technically a limited partnership. No such problem exists for GLD.

Current prices:

GLD $96.10
USO $37.69