I do not mean to be an alarmist for its own sake. It is always the little noticed blind sides that affect us the most.
I believe the Taiwan currency crisis is a symptom, not a cause, not even a trigger of what awaits the world. What alarms me about Taiwan is that, for a geographically small place and its 20 odd million folks, it is on the order of a godly portion of Japan, not Korea, and certainly not Thailand.
That money may be needed soon back home to shore up the economy.
Taiwan, like Japan, has a Mickey Mouse democracy, on-going political crisis, imports oil, has huge trade surplus directly and indirectly (via China/HK based factories/companies) with the US, and will have a full blown banking crisis, only to be made worse by a currency devaluation already underway. Taiwan holds not much less than the Japanese in foreign currency reserves, exports capital the world over. The capital is exported to China in the form of productive factories, to SE Asia in the form of buildings and factories, to HK in the form of dirty money, and to the US in the form of treasuries (top five foreign holders some times, top three at others). Now, Taiwan banks, being the gamblers they are, are also counter parties to much derivative trades. Taiwan can buy Thailand, Indonesia, Philippines, Korea, Mexico, Brazil and a chunk of Japan over the course of a tea break. Interesting little place.
Taiwan, unlike Japan, has far more (90%) retail stock investors as opposed to institution and foreign investors, but similar to Japan, the stock investors have piled on debt to buy real estate, and pile on debt on the real estate to buy stock.
Unlike Japan, the institutions in Taiwan, and certainly the private citizens, will ignore government directive to "not panic", especially when faced with possible loss of entire bank and stock account holdings. The factories in China cannot be liquidated. The buildings in Taiwan and SE Asia face a poor buyers' market.
Like HK, Taiwan has a large 120 billion stock stabilization fund, but unlike HK's profitable fund operation, Taiwan lost half already, making equity market intervention not likely to be successful, especially if the DDP keeps talking about independence and the KMT keeps scheming with the Communists.
What can be sold then are the US treasuries, but probably not to Japan and certainly not to China, the other top foreign holders. The willing and able buyers are in the US.
The picture is less pretty than any news one is likely to see in print, yet. I follow the popular press in Taiwan and I am enlightened by observation that everything is so calm, much as I look out my HK office down to the construction site below, and the calm pedestrians walking past plastic wrapped old building as it is being torn down from the top floor downward by a heavy tracked vehicle hoisted above, hidden behind the plastic wrap.
Now, the crisis, should it go as I fear, it may boost US$ initially as folks run blindly to what is the safest at the moment, but may further weaken the US export sector, as well as hurt US domestic producers of many electronic vendors. Gold may get a bounce as the Chinese populations generally store some wealth in the metals, and gold is very liquid in these parts, tradable in most bank offices.
I am making some forward-looking statements here as clearly as I know how. If I am right, how the whole matter plays out will depend of course on how many other issues play out. What comes immediately to mind are Russia, Isreal, Iraq, Japan, China, Argentina, US, debt, equity, oil, and of course what the US president says if cross Taiwan strait relationship gets interesting again. The Europeans with their own problems will not matter much to the coming drama. I probably missed out on many more important issues I am not positioned to fear.
I just do not see the upside until some matters blow up. |
