A blog focused on educating global physical energy commodities participants on evolving financial, regulatory and marketing developments in the Asian commodities markets including use of cryptocurrencies in physical commodities trading. This blog seeks to educate market participants only and does not constitute financial advice.
In July 2022, the European Central Bank published a blog on the "key objectives of the digital euro". The blog co-authored by none other than Christine Lagarde, President of the ECB argued that a digital payment ecosystem such as the digital Euro without a strong monetary anchor would create confusion leading to financial instability as "it is crucial that we all still have easy access to central bank money, which is the foundation of our currency".
In January 2022, the Federal Reserve came out with a highly anticipated paper on a digital dollar, taking a step in a process that could lead to Congressional action. This was followed in March 2022 by an Executive Order from the Biden administration placing the “highest urgency” on exploring a US CBDC and asks for an interagency report on all aspects of the future of money in the next 180 days. The Executive Order also advances US participation in cross-border experimentation of wholesale CBDCs.
The ECB is analyzing how financial intermediaries could provide front-end services that build on a digital euro. The analysis expected to completed by October 2023 followed by the development of integrated services as well as carry out testing and possible live experimentation of a digital euro in a phase that could take around three years. Extrapolating this timeline guidance from the ECB, it would be safe to assume that a digital Euro will not be available before 2028 at the very earliest. The ECB is likely to drive large scale adoption of the digital euro once adopted and likely to increase the proposed amount of digital euros in circulation to 1.5 trillion euros to control the negative effects on financial stability.
The Fed also sees commercial banks and nonbank financial companies acting as intermediaries. Banks would issue and manage the digital wallets that people would use for payments and deposits. The US is the furthest behind when it comes to developing CBDCs among the G7 economies, according to the Atlantic Council.
Central bank digital currencies like the digital dollar and the digital euro are expected to be used for payment settlement. CBDCs pose tough competition to cryptocurrencies used for cross-border payment settlements such as Ripple (XRP) and to a limited extent Bitcoin (BTC). The underlying technology for both the digital dollar and the digital euro is based on concepts in cryptography and distributed or decentralized solutions such as DLT.
Changing US immigration legislation landscape, slowdown in capital spending on IT and competition from newer, cheaper sources of IT labor pool such as the Philippines and China is forcing the Indian IT outsourcing industry to metamorphosize into providing alternative models of outsourced services (see video). IT outsourcing has created more than 2 million jobs and in 2012 contributed 6.4% of India's GDP according to the National Association of Software and Services Companies, based in New Delhi. Already, IT outsourcing behemoths such as Infosys are being squeezed by revenue pressures and forced to try new strategies in an increasingly commoditised market. Unless a new paradigm shift in IT outsourcing occurs, Indian IT outsources may spiral downwards further hurting India's weak growth prospects. Investors are strongly cautioned to diversify away from IT outsourcing linked equities and increase their exposure to US dollar denominated assets.
Austerity obsessed ECB lowered its main interest rate this week from 0.75% to 0.5% but along with this cut caused a stir about whether the bank might also cut the deposit rate, taking it into negative territory (which would mean banks having to pay for leaving money in the facility and would ostensibly push banks to lend more rather than hoard cash). ECB dropped hints on the negative deposit rates to express their frustration with banks that are hoarding cash and not lending. Clearly at the ECB, the money printing carrot does not seem to be enough to revive the moribund European economy so now this stick has been added to the equation. The unintended consequence of these negative deposit rates would be to put enormous downward pressure on the Euro jeopardizing the value of Euro denominated assets. Expats should look at reducing this risk by diversifying their portfolio through exposure to US dollar denominated assets. The most suitable vehicle for this type of optimal diversification would be an offshore bond.
The Reserve Bank of India (RBI) clearly fears inflationary pressures in India to the extent that it cut the repo rate only by 25 basis points today disappointing markets. RBI governor is quoted in the Economic Times as saying that "Conditional upon a normal monsoon, agricultural growth could return to trend levels. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps." Persistently high current account deficit, credit growth falling to the lowest growth rate in over a decade, and now the RBI's own admittedly hawkish stance on inflation only add to an abysmal prognosis for the fate of the Indian rupee. Expectations that the Rupee will hit 60 to the US dollar are steadily rising. Government Pollyannas still try to come up with creative explanations to invent a growth story (see video).
As long as the RBI's Liberalised Remittance Scheme is still available to Indian residents, Indian or NRI investors are strongly urged to increase their portfolio exposure to US dollar denominated investments. You only have yourself to blame if your net worth significantly falls due to a sliding Indian rupee.
The bears seem to be coming out of the woodwork in droves. The latest being Albert Edwards of Societe Generale who famously called for the S&P to drop below March 2009 lows back in May 2012 (see video). This week Mr. Edwards repeated his call for the S&P to drop to 450. In a report titled We still forecast 450 S&P, sub-1% US 10 year yields, and gold above $10,000 released this week “There are some ever-present truths in this business. Economists usually forecast a return to trend growth and will never forecast a recession. Equity strategists tend to forecast the market will rise 10% each year and will never forecast bear markets.” Well, apparently Mr. Edwards strongly believes in being the contrarian. Last year his call was completely wrong, will he get it right this time around? There is mounting evidence to suggest that his call may again be wrong this year but then every contrarian does have his day. Time will tell if Mr. Edwards' call proves to be correct or if he will be forced to repeat this call again next year this time around.
In the classic James Bond film "Goldfinger", the villain (Mr. Goldfinger) professes his love for the yellow metal (see video clip) and claims to get to into any enterprise that will increase his stock. There have been many such Goldfingers who were happy to ride the price wave of Gold until the massive drop of over 9% this week shattered their confidence in the yellow metal. Many of my clients have sent me panicky emails asking if they should dump the metal. Gold is only a holder of value and does not give dividends or interest, so when this perceived value is lost, pandemonium is primed to ensue. The best strategy is to wait out the downturn and do absolutely nothing. Perhaps the classic dialogue between James Bond and Mr. Goldfinger can be reworded thus: "Do you expect me to Sell?". "No, Mr. Bond, I expect you to Hold".
Everyone from Bill O'Reilly to Peter Schiff to Marc Faber have been prophets of doom for a long time on the US dollar frequently making dire pronouncements on the coming collapse of the dollar (as shown in this video featuring Bill O'Reilly). The simple truth is that it is best to be in US dollar denominated investments in the near to medium term as opposed to investments denominated in any other currency including pound sterling. Indeed at Capital Economics argues today the US is not broke and the dollar won't collapse.
One only has to observe the wobbly nature of all other currencies who are in a currency war against the dollar (and against each other) introducing inflationary pressures into their respective economies (except for the Euro which has different set of problems altogether. I recommend staying in US dollar denominated assets in the near to medium term as all other investments come with significant exchange risk.
