How to survive the Great Unwinding of policymaker stimulus
on January 27, 2015

Merryn Jan15aI was privileged to be interviewed by Merryn Somerset Webb, editor-in-chief of MoneyWeek (the UK’s best-selling financial magazine) in this week’s edition.  The interview covered a wide range of topics including the perilous state of UK house prices and some stock markets, and has prompted enormous interest amongst MoneyWeek readers.

Merryn is one of the UK’s leading financial journalists, writing for the Financial Times as well as working regularly for the BBC and other media.  Some highlights from her summary of our discussion include:

Oil prices.  “How is it that his crystal ball works so much better than everyone else’s? It is, he says, all about understanding the “great unwinding of policymaker stimulus….the oil price at $100 was not a function of real demand, but of credit driven demand.  It was a “charade”, says Hodges. “There has never been, since 2009, a single moment anywhere in the world where there was a physical supply shortage.” Instead, the price rise was due to “every pension fund in the world” knowing that the Federal Reserve wanted to devalue the dollar. They looked for a store of value to protect themselves. “That, of course, was oil… it’s a large market, and it’s priced in dollars… suddenly you’ve got financial players going into the market. What happens? Of course, the price rises and goes from $30 at the end of 2008 up to $120, because you can’t print oil in the way that you print money.”

Impact of the US$’s recent surge in value.  The rising dollar might not seem that big a deal. But, says Hodges, it is if you look at the $6trn-$7trn of debt in the emerging economies all tied to the dollar.  When they borrowed  dollars at 1%, it looked clever. But as the dollar rises so does the value of their debt. Not so clever. “You’re going to see bankruptcies all over the emerging economies.”

China and Quantitative Easing.  “Extreme monetary policy has given us a “sugar high”, with all markets going up in a straight line – and in the commodity markets at least, this is being justified by the apparent rapid growth in China. But what Hodges, who “used to work with President Xi’s father in days gone by”, spotted, was that China was going to slow much faster than most people expected.  President Xi and Premier Li are moving forward on what they call the ‘New Silk Road’.China is worried  about employment and income levels.”  So Xi is looking to boost the economy with, for example, ambitious railway links all the way from China to Europe.  He wants to build for the future: to “recreate the position of China as the Middle Kingdom … we don’t know, of course, whether it will work, but it’s far better than building empty skyscrapers”.

You can watch the full interview on the MoneyWeek website by clicking here.  Or you can download Merryn’s 2-page summary of the interview in this week’s MoneyWeek by clicking here.

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