Russell Napier is the author of The Solid Ground Newsletter. He began writing the global macro-strategy report in 1995 for CLSA, a capital markets and investment group based in Hong Kong. He forecast what was to become the Asian Economic Crisis and was voted Asia’s #1 equity strategist in all of the leading polls at the time. His forecasts were compiled in a book he published last summer, “The Asian Financial Crisis of 1995–1998: Birth of the Age of Death.”
The world is living through a breakdown in the global monetary system. He has advised clients to invest for the outcome versus just living in another business cycle expansion. That’s why I subscribe to his newsletter and value his views. He isn’t afraid to stand for what he believes in. Learn more about his book in this episode of Upthinking Finance™.
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Let’s assume that a government authority is running the Hong Kong peg, linked at a set rate to the US Dollar. If there are lots of buy orders for the currency, it will push the exchange rate up. But let’s say it’s not allowed to go up, so the government entity must intervene in the stock market. When it intervenes, the government accumulates United States Treasuries on the asset side of the balance sheet.
But people forget to focus on the liability side of the balance sheet. The government has to buy treasuries with newly created Hong Kong money in the form of commercial bank reserves. It’s exactly what happens with quantitative easing—assets go up and the central bank's liabilities go up. It is supposed to lead to an economic boom. That’s what was happening in Asia.
The assets accumulated by the Asian Central bank were treasuries from someone else’s bond market. Some of the banking systems were growing their assets by 30% annually, an unbelievable boom fueled by the exchange rate policy. There was no incentive for anyone to intervene.
It all started with Thailand and then bled to Russia. In the 90s, Korea was one of the biggest exporting countries in the world. When their currency went under, the world was flooded with cheap products from Korea. It played a key role in bankrupting Russia. Brazil was next. It was toward the tail end that it brought down Long-Term Capital Management (LTCM).
The Fed slashed interest rates and bailed out LTCM. It sent a message that if anything happened in the markets that would be bad for the American economy, Alan Greenspan would intervene. The reaction of Greenspan...
