The Week of May 6 2013, In Review -Currency War & Manipulation-

burning-interest-ratescurrency warsBurining Japanese Yen


Dear PGM Capital Blog readers,
In this weekend blog edition, we want to discuss with you some of the most important events that happened in the global capital markets, the world economy and the world of money which are:

  • The Reserve Bank of Australia cut rate at record low on Tuesday, May 7th 2013.
  • The risk of investing in USA treasury bond, according to Warren Buffett
  • The close of the Japan Nikkei Index at a 5-year high & the dip of the Japanese Yen below 100 against the US-Dollar, a five-year low on May 1o, 2013.

The Reserve Bank of Australia to cut rate at record low on Tuesday, May 7th 2013:
Following a spate of soft economic data, the Reserve Bank of Australia, decided to cut the cash rate with 25% to a record low of 2.75% as can be seen from below chart.

Australia Cash Rate History January 1st 2000 - May 7th 2013

As a result of this  the Australian Dollar fell against the US-Dollar to close the week almost on parity against the US-Dollar as can be seen from below chart.

May 10 2013 One year AUD-USD history

RBA governor Mr Glenn Stevens added that while an easing in interest rates has flowed through to the economy, the Australian dollar remained at a “historically high level over the past 18 months”.

The risk of investing in USA Treasury bonds:
The veteran and USA’s richest investor Warren Buffett has warned that savers and bondholders are suffering a “brutal” erosion of their money as the US Federal Reserve and other central banks force yields to historic lows.

I feel sorry for people that have clung to fixed-dollar investments

He told investors at Berkshire Hathaway’s annual meeting in Nebraska.

According to Mr. Warren Buffett, the FED Chairman, Mr. Ben Bernanke had tough choices to make after the 2008 Financial crisis and global markets meltdown, but he decided to step on the gas pedal, and he’s still got his foot on the pedal, and that really does hurt savers.

“It is brutal. I don’t know what I would do if I were in that position,” he said.

Analysts have been fretting for months that long-dated bonds may suffer a nasty bear market as economic recovery takes hold and starts to force up interest rates, with growing talk of a “great rotation” from bonds into equities.

Two of America’s biggest banks issued a client alert in January, warning of a “bond crash” like the sell-off in US Treasuries in 1994.

Below 5 -year chart of the yield of the treasury bonds shows that on the close of the market on Thursday May 2nd 2013, the yield of the USA 10-year treasury bond was 1.63%.

5 years history -yield USA 10-year USA treasury bond-

USA 10-year-notes yielding 1.63% is equivalent to a stock or index trading at a Price to earning ratio of 61.35, for which a Price to Earning’s ration of 15 can be considered as neutral. To give a comparison, the NASDAQ before its crash of March 2000, was trading at about 40 times earnings.

Below all-time history chart of the yield of the US-10-year-treasury-note shows, that the yield of the USA-10year-note on May 2nd 2013, was at an all-time low of 1.63%.

220 years of 10year bond rates

The above mentioned means that currently the USA Treasury bond market is in a Huge Bubble, which can burst at any time.

The close of the Japan Nikkei Index at a 5 year high & the dip of Japanese Yen below 100 against the US-Dollar a five-year low on May 10, 2013.

On Friday, 10 May 2013, Japan Nikkei 225 index, closed at a 5 year high of 14,607.54 points, as can be seen from below chart.

Nikkei 225 5 year chart

On the other hand as can be seen from below chart, the Japanese Yen closed on Friday May 10 2013 at USD 0.98 for 100 JPY, its lowest level of the last 5 years, or 30% lower than before the inauguration of Japan’s current prime minister Shinzō Abe on December 26th 2012, who promised to end Japan 20 years of recession and deflation by allowing massive money printing by the Japanese central bank.

May 10 2013 One year JPY-USD history

With an appreciation of the Nikkei, which is measured in Japanese Yen, during the last 6-months with approx 40% and a depreciation of the Japanese Yen against the USD with 30%, in the same period, the net appreciation of the Nikkei-225 is net only 10% for those owning japanese stocks.

A depreciation of the Japanese yen with 30% made Japanese export products 30% cheaper measured in the USD, but on the other hand, savers and bondholders have seen their purchasing power depreciating with 30% during the last 6 months.

The above clearly shows that we are now entering a crucial phase of the ongoing currency war, a phase in which countries will depreciate their currency in order to inflate their stockmarkets and promote exports.

It should be clear that this process of systematic and deliberate depreciation of the currencies by Central-Banks and politicians, will ultimately lead to a complete dilution of purchasing power of all fiat currencies and subsequent loss in trust in paper money, fixed term deposits and treasuries  which will lead to a massive dump and subsequent flight into Gold, Silver and other precious metals, which cannot be printed by central banks and politicians.

The consequences of this will be disastrous, like banks, states, countries going bankrupt, pension funds unable to pay pension to retirees, fiat currencies to be declared not tenderable.

For the sake of humanity we hope we are wrong. But in the meantime, until there is no proof that we are wrong with our analysis, we advise our readers to avoid bonds and paper money. More importantly, we advise  them to put their money in hard assets, especially Gold, Silver and other precious metals, in an account in a low-debt country with a history of protecting (foreign) investors and account holders’ interests.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

Leave a Reply

Your email address will not be published. Required fields are marked *