That’s the provocative thinking from SocGen’s Albert Edwards who writes:
- We have just returned from a marketing trip to Hong Kong and Singapore and had some very fruitful conversations with clients. Much of the discussion centred on the likelihood that the Bank of Japan (BoJ) would lose control of the printing press and how a rapidly declining yen would lead to a replay of the 1997 Asian currency debacle. It seems investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse. We discussed how that scenario might mirror what is happening today.
- We have noted previously that China has seen a pronounced rise in its real exchange rate in recent years mirroring events in Thailand, Malaysia and South Korea in the run-up to the 1997 crisis (and indeed the GIPS prior to the eurozone crisis). In addition, China, and many other key EMs have seen a trend deterioration in their balance of payments (BoP), partly as a result of the repatriation of foreign direct investment again echoes of 1997. Hence despite a $128bn rise in Chinas first quarter foreign exchange reserves to a record $3.44 trillion, we note the yoy growth rate is still only a paltry 4% (see chart below). And although 4% is an improvement on recent data, it is a far cry from the rapid growth rates of recent years and represents a huge monetary tightening that may help explain recent poor Chinese data.
I don’t know how valid these thoughts are. I’ll be reading this and this as a starting point and report back to you when I’ve come to my own conclusions. If you have thoughts on the potential instability caused by the sudden plunge in the Yen’s exchange rate I’d be curious to hear them.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.