Sunday, November 11, 2007

Sitting ducks are on offer :: Telegraph

Back in October, in The Telegraph
The wolf packs are circling. Fifteen years after George Soros smashed the sterling and lira pegs of Europe's Exchange Rate Mechanism, central banks have invited hedge funds to pounce again. This time on a global scale.

Sitting ducks are on offer across Eastern Europe, the Middle East and emerging Asia, each offering an irresistible one-way bet for speculators with deep pockets.

What the candidates all have in common is inflation, the ever-higher penalty they pay for chaining their destinies through currency pegs and dirty floats to the dollar and the euro, the currencies of two enfeebled blocs – one a fat roué at the end of his credit, the other a stooped old gentleman with a stick.

The global M3 money supply is growing at 10.6pc as stimulus from America, Europe – and Japan, through the carry trade – leaks out to the vibrant parts of the world economy.

Money is expanding at 18pc in Saudi Arabia, 19pc in China, 24pc in India, 36pc in the United Arab Emirates, 41pc in Russia and 69pc in Venezuela.

With the usual lag, inflation has at last hit. Prices are rising at 6.5pc in China, 9pc in Russia, 9pc in Vietnam, 11pc in the UAE and 12pc in Qatar – to name a few.

Only nations with very rigorous monetary regimes seem able to resist this tide of liquidity. Most are floundering. Hence the rush by investors to profit from these unrestrained bubbles by piling into their stock markets.

Kuwait became the first Gulf state to ditch its dollar peg. Others are hanging on, but inflation has reached 10pc in the United Arab Emirates and 11.8pc in the gas-rich neighbour of Qatar.

They have balked at cutting interest rates in lockstep with the Fed. So have the Saudis. This makes pegs untenable over time. Matt Vogel, of Barclays Capital, says a riyal "carry trade" has already begun in Saudi Arabia. Speculative flows are surging into the kingdom.

The Gulf region has $3,500bn under management in reserves and wealth funds. It has the firepower to shoot wolves, but does it make any sense to do so? Buying dollars leads to even more inflation. In any case, Qatar has already slashed the dollar share of its $50bn investment fund from 99pc to 40pc. The game is up.

Further east, Vietnam is throwing in the towel as inflation hits 9pc. It said it will no longer hold down the dong by massive purchases of US bonds.
Plenty of metaphors on offer as well.

If you've not watched this informative video it is well worth your time:

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