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MARKET INSIGHT REPORT
The West Is Old, the East Is Young
By John R Taylor, Jr.
Chief Investment Officer

Actually, the East is older than the West. While Europe was in the Dark Ages before the
Renaissance, China and India were bustling societies, far advanced intellectually and
scientifically than the West. However, starting around 1500 the Europeans caught up
and eventually far surpassed the East. By the end of the 19th century, Europe and its
North American offspring had conquered, intellectually overwhelmed, and economically
dominated the East. But history runs in cycles. From the top, there is nowhere to go but
down. Eventually the reversal always occurs, and the past few years are giving us the
sense that this change in positions began several decades ago. Now the news is all
about around us, and it seems to describe an acceleration of the process.

This doesnt mean the East will just power ahead, as dramatic growth and change brings
wars and confrontation, which doesnt occur with the slow slide into irrelevance. The
pictures of the Vietnamese and Chinese ships jockeying and bumping each other in the
South China Sea this week and articles on the Japanese moving troops to Amami-
oshima Island about 150 kilometers from the very disputed Senkaku Islands, makes it
clear that more confident and growing countries are feeling their oats. Unnerving though
it might be, military spending is part of the modernization process generating scientific
advances, new consumer products, and wealth. The European states are following the
mirror opposite path, cutting their military and lessening their ability to project their
influence outside of their own borders. The most recent example of this enervating
process is the situation in Crimea and the Ukraine where the Western states were
unable to impact the situation in any way as the Russians re-took Crimea
notwithstanding the vehement objections of NATO, the EU, and the United States. The
process of absorbing Crimea was not in the least bit slowed and Western help was
totally worthless for those who wished Crimea to remain within the Ukraine. Even the
Wests offer to finance Ukraine is likely to prove feckless as the West does not have the
many billions necessary to allow the country to survive and grow, and the major
beneficiary of the funds that are being squeezed from the IMF and the impoverished EU
will be Russia, not Ukraine.

On Wednesday, Russia signed a deal to supply natural gas to China for the next 30
years. The volumes and the construction around this project are enormous and will
change the shape of Eurasia, slanting it to the East. Germany and the EU will be
playing second fiddle to the Chinese. This might or might not be the best thing the
Chinese and the Russians could have done, but it has taken the first move advantage
away from Europe. We are not among the optimists about the long-term prospects for
the Chinese miracle as we see many of the Communist problems that crippled the
USSR as unsolved in China, but this is only a minor bump in the road to the Easts
domination of the West. The economic value of this transaction will prove more lasting
than the political relationship. Whether the East is Red is less important than the East
is economically vibrant. We would be remiss if we did not mention the fact that the West
is rapidly selling all its gold to the East. At the rate this transfer has taken in the past two
years, in another 10 the East will have virtually all the gold. Before that happens the
price will go way up and the East will be the victors again. Of course, the West thinks
that gold is a barbarous relic, so we dont care at all
FX CONCEPTS FX CONCEPTS
GLOBAL MACRO RESEARCH GLOBAL MACRO RESEARCH
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To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com


CURRENCY Asia Long-Term View

Pride, Inflexibility, or Perseverance
By John R. Taylor, Jr.

One of the advantages in managing foreign exchange is
that with very complex information flows and no effective
models, we must trade often to minimize our risk of loss.
We learn a lot about ourselves. Anyone interested in
avoiding a major mistake has to understand his or her
persona and how it reacts to uncertainty, change, and loss.
Central bankers and other financial bureaucrats cannot be
so flexible and do not receive instant (often financial)
rewards for being correct. Because of this government
authorities are often out of touch with what is going on in
the markets and the economy they are meant to be
watching. Decisions to stay put or to change are always
hard to reach, but if there are few decisions rather than many the risks of each one is
magnified, especially as the size makes each more public. The resultant hesitancy to
change clogs the decision-making process. Is it perseverance, a well-respected
character trait; inflexibility, a trait often associated with ignorance; or pride, the one that
brings all to their knees in Shakespearian or Greek tragedies, that slows the process?

The reaction function of money managers is many times quicker, so they are often the
ones that lead the market in a new direction. Among governments, there are different
personalities, too. The Fed is the most skittish, the ones who are most in touch with the
changes in moods and data that impact prices. The ECB is slow to react, often moving
too little and too late compared to what their reaction function should be. But when one
considers that fact that there are 18 countries sitting around the ECBs table plus the six
direct employees of the bank, it is a wonder they ever move on time. The worst of the
G-10 government managers are the Japanese, as they seem to close their eyes to
reality, leading us to see them as very proud and inflexible. Although we know they are
intelligent individuals, as a group they act in a fashion that often shows ignorance of
human nature and history. There seems a powerful pride underlying this willful attempt
to challenge fate by ignoring the lessons of great thinkers of the past and the very
valuable modern statistical calculations of the 21st century.

The Bank of Japan met earlier on Wednesday and did nothing to mitigate or even
rationally discuss (with their very interested global and Japanese public) the current
impact of the consumption tax hike. Despite data points that show trouble occurring, they
are not discussed. There is a distinct risk the reaction to this hike will be similar to
that which occurred in 1997 when the Japanese economy went into a severe
recession, the one that brought the financial system to its knees and almost
destroyed the economy. Despite the fact that many Japanese economists and other
analysts have pointed to this tax hike as a very badly timed strategy and that no
strategies began until many months after the fact, the Kuroda-led Bank of Japan is
repeating this error. The charts we have attached show all types of currencies are
threatening a major decline against the yen. A move that would negate the Abe
revolution and put Japan in a worse place than before it stated. The cycles are arguing
that this decline could either grow at this point, or will be delayed until August, when the
impact on the internal Japanese economy will be more severe than it is today.