Thursday, August 28, 2008

Phase transition.

I am once again ignoring my self imposed "rule"*** to resist injecting metaphors into my commentaries. Indulge me.

The macro issues that I have been writing about for months now (the Chinese stock market, the U.S. Dollar, The Euro and commodities) are more or less coming to fruition. Now what?

In thermodynamics, phase transition is the process of matter changing from one form to another. International capital is now changing form from a risk-seeking, yield hogging form of liquid, to the decidedly less fluid form of a solid which seeks safety and blissful contentment.

a few thoughts:


Interest rate compression in the G8, rate increases in Emerging Market countries. Flight to safety, quality and transparent legal processes for the orderly work-out of debt convenants. The credit/liquidity hurricane touches down on the continent.

Spreads between peripheral EU countries and core countries continue to widen. Calls for synthetic inflation exportation are met with cries of unfair trade practices.

U.S. financial assets ascendent.


The Russian Bear hibernates, suitably chastened by international capital flight (due to both war and strange instances of the expropriation of foreign owned assets.)

The EU continues its decline. Does anyone here know the capital and current account between California and Washington State? The EU countries still calculate this...the participants themselves are telling Brussels "this is NOT an optimal currency area".

Long run:
There are major geopolitical risks in Latin America - a region that has far-left leanings. The deflating of the commodity boom will cause serious sovereign debt risk for Brazil, Argentina and Chile. 20 years from now, pure communism will only be found in Latin America.

China faces widespread deflation, low growth, economic stagnation, and politcal unrest.

The EU is dissolved, European realpolitik resumes after the minor speed bump of Maastricht and Lisbon.

Japan muddles along at 0%-1% growth in real terms.

The U.S. continues to be the world leader in employing physical and financial assets to produce excellent investment returns.

***My father once told me "any rule that is not a law should be distrusted"

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