CLSA INDO US$ debasement starting, or not?

Emerging markets have been a massive outperformer in recent months (JCI up a staggering 80% in USD terms from Oct lows). Not only fundamentals of most markets in east is in better shape that in the west, the renewed weakness in the USD is very bullish for these markets especially for resources economies like Indonesia. The dollar index DXY is now hovering the critical support level of 80. A break below 80 could signal the inflection point of the dollar debasement trade. Chris Wood has been banging on the dollar debasement trade for a while. In his latest Greed and Fear - flash, he is saying yes, it is inevitable BUT NOT JUST YET as deflation remains the predominant danger. One clear signal of imminent inflation would be a climax of appalling US policy.

Commodities and emerging markets have done phenomenally well. Many of the commodity plays have already priced in some extremely bullish assumptions. ANTAM is on 57x earnings now. To justify this valuation nickel price has to go up another 40%. We at CLSA sales desk have been a consistent inflation bull but risk reward does not looking compelling in the short term when stocks moved up 100% in a few weeks. However, any meaningful correction will present a buying opportunity. The end game of Central Banks are clear. To print themselves out of debt punishing savers to redeem the sins of debtors. This is no doubt highly inflationary.

Fundamentally, as highlighted in an article in the latest edition of the Economist “Boom and Bust”, the steep fall in OIL the ultimate commodity over the past year is paving the way for another spike when demand resumes. Many factors behind the record breaking spike last year are still very much in place. Much of the world’s “easy” oil has already been extracted and or is in the hands of nationalist governments that will not allow foreigners to exploit it. That leaves the oil firms with reserves in ever more inhospitable and inaccessible places. Such fields take longer and more expensive to develop. New discoveries tend to be smaller and run dry faster.