FX CONCEPTSFX CONCEPTS!GLOBAL MACRO RESEARCHGLOBAL MACRO RESEARCH

CURRENCIES INTEREST RATES EQUITIES COMMODITIES

To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com

!!MARKET INSIGHT REPORT Because Credit Is Money, Deflation Has Won By John R Taylor, Jr. Chief Investment Officer Although the title of this letter is a broad generalization, both about credit replacing money as well as its shrinkage, and it covers only the monetary situation in the developed world, the global tendency is clear. Any uprooting of this now powerful trend would be more and more difficult as well as unpalatable for the authorities involved. As cash money becomes obsolete and digital memories become the real money, even a Ben Bernanke dropping $100 bills from helicopters would not reverse this trend. The freely given cash bills would be squirreled away as a safety net if the digital credit stream were somehow disrupted, going directly into a mattress in a more basic primal response. It also could be used to pay down credit balances, to be spent later. Credit is now money and cash isn’t. In most cases cash takes the place of a savings account (or gold) – something that pays nothing but is always available – in case the credit is not around. Twenty years ago, houses, cars, and white goods (stoves, refrigerators, etc.) were impacted by the availability and the price of credit. Fifty years ago, the price of credit was fixed, and was therefore much less available. Now everything is. Today credit is always available at a cost and the US and Europe are speeding in the direction of a cashless society. In New York, cash is so rare that taxis are almost never paid with it. Parking meters take credit. !But this new layer of intermediation between you and your money is a wild card. Hundreds of years ago, gold and silver coins were cash. With them you had money, without them you didn’t. There was no intermediary between you and your wealth – you had it with you or in your home. When banks came along, they held your money and gave you letters of credit and banknotes. When the government stepped in, they issued the banknotes – currency – and we entered the modern world. Other than the few gold coins you might have kept at home, your liquid wealth went through bank and government intermediaries. The government was out of your control and could print money willy-nilly, making the currency worth less if they wanted to, but the bank was your agent. If you put money in the bank, it was there – they didn’t decide there would be more or less available to you. It was as it were yours even though it was in a bank. If you didn’t have any cash, you had to go get it at the bank. All of your money was current – it was there – it was put there in the past. Now in the age of digital money, most of it is not there. Money is a digital entry that almost never becomes cash, but most important it is credit, something that does not yet exist, but might if you want it. It is the bank’s projection of what you should be allowed to have. Your bank likes you, they give you a $25,000 line – you now have temporary possession of that money. If you look good, and the bank feels good, they might up the amount to $40,000. You now have more money than ever, but you are dependent on the bank’s ‘feeling’ about you and your financial position as well as their feeling about the world situation. !Banks have created the credit – the money – and the boom that came from it. Monetarism is central, but it is not M0, M1, or M2 that count, it is ‘available’ credit. Now banks are pulling back. They are doing it because it is better for their bottom line, but their reluctance to lend means you can’t spend as much. The banks have decided you are not as wealthy as you were. The banking authorities are pushing the banks, as they see them as too highly geared. Cut back the gearing, cut back the spending: smaller banks mean less money. With the same production, but less spending, prices drop. It’s Economics 101.

FX CONCEPTSFX CONCEPTS!GLOBAL MACRO RESEARCHGLOBAL MACRO RESEARCH

CURRENCIES INTEREST RATES EQUITIES COMMODITIES

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 !When the Cat Dozes for a Second By John R. Taylor, Jr. _____________________________________________________________________________ !The Bank of Korea is actually in an envious place, but all it sees is a struggle ahead. Growth, a bit of inflation, capital clamoring to get in, and a world buying the country’s exports look pretty good from almost any vantage point. With the 10 year bond yielding 3.11%, higher than Spain, Italy, the UK and the US and inflation at 1.7% and dropping from 2.3% two months ago, despite the BoK’s earlier worries, what is not to like. The current account is about +6% and if the US and the Eurozone pick up the economic pace in the second half of the year, it is almost hard to fathom how the Korean carmakers can keep up with demand. The USD/KRW is at a level that has not been seen since July 2008, dropping below 1010 on Wednesday, but there is room to go as the won was below 900 when the global equity markets made their highs back in October and November 2007. Why should we not go there again? Is the Korean economy outperforming most everyone else – and if it is missing a few – does it not have the weakest currency of the very strong? It does, so buy won. !The won/dollar rate might seem very high and it is a problem, according to the Bank, but it is the yen that really gets everyone in a tizzy. The KRW/JPY has rallied by almost 20% in a year and over 50% in the last two years. It has just poked up to its multi-year high (since late 2008) on Wednesday. This is an epoch turn in fortune. Between 1990 and the low trough between October 2008 and the middle of 2012, the won lost over 70% of its value versus the yen. Remember 1990 was the peak of the Japanese miracle – and it was Japan’s second wind that pushed it up there – but it is not the same country today. Now Korea is chewing up the ground in what we believe is its second multi-decade move higher. It is now a mature country building atomic plants for Bulgaria (or so the news says) and exporting the finest in consumer goods and machinery. It has few if any equals in a dozen areas of manufacturing expertise. The Bank of Korea might be fighting every step of the way, but the won is moving higher. Set that against the yen, which should be moving lower for the second half of this year and long KRW/JPY looks like a sure thing. As we said in our last letter about this cross back on May 28, just let the BoK and BoJ give you your entry points. !The short term cycles look for some strength, but there should be a second low, probably no lower than 10.0500 in the week of July 21. The big resistance is at 10.2000 and if that is seen in the next two weeks, we would be taking profits, but never going short. Buy it for a move up to the 10.4500 area in late August. If the BoK takes a catnap then we could even see 10.9000. Remember this cross should rally into December – this could be a tremendous winner – and it is a carry trade.