I write this letter to counteract some of the solutions that Western politicians are recommending for China to cope with its buildup of excess foreign-exchange reserves. Raising the renminbi’s exchange rate against the dollar will not cure the China-US payments imbalance. The dollar glut will continue, and so will the currency fluctuation among the dollar, euro and sterling, leaving no stable store of value. The cause of this instability is that each of these three currency areas has grown top-heavy with by debts in excess of the ability to pay.
What then should China should it do with its buildup of excess reserves, if not recycle its inflows into their bonds? Four possibilities have been suggested: (1) to revalue the renminbi, (2) to flood China’s economy with credit (as Japan did after the Plaza Accord of 1985), (3) to buy foreign resources and assets, and (4) to use excess dollars to buy back foreign investments in China, given US reluctance to permit Chinese investment in America’s own most promising economic sectors.
I explain below why China’s best course is to avoid accumulating further foreign exchange reserves. The most workable solution is to use its official reserves to buy back US and other foreign investments in China’s financial system and other key sectors. This policy will seem more natural as a response to an escalation of US protectionist moves to block Chinese imports or block China’s sovereign wealth funds from buying key US assets.
China’s excess reserves will impose a foreign-exchange loss (as valued in renminbi)
Every nation needs foreign currency reserves to ward off currency raids, as the Asia Crisis showed in 1997. The usual kind of raid forces currencies down. Speculators see a central bank with large foreign currency holdings, and seek to empty them out by borrowing even larger sums, selling the target currency short to drive down its price. This is the tactic that George Soros pioneered against the British pound when he broke the Bank of England.
Malaysia’s counter-tactic was not to let speculators cover their bets by buying the target currency. Its Malaysia’s success in resisting that crisis showed that currency controls prevent speculators from “cashing out” on their exchange-rate bets, blocking their attempt to…
We’ve often noted the fact that China’s equity market has served as a very reliable leading indicator over the last few years. They led the way with a dramatic market crash that started in 2007 and they bottomed several months in advance of the 2009 bottom in the S&P. We recently highlighted the bearish action in Chinese stocks while U.S. investors continued to pile into the S&P (one of three primary reasons we built short positions for the first time in 2 years prior to the recent stock collapse). Ultimately the market faltered and China’s equity market is once again looking prescient. China is displaying classic post-bubble market action. Our friends at Bondsquawk ask the important question that should be on everyone’s mind:
"Could the Chinese markets lead the rest of the world back down?"
China’s Shanghai Composite Index has led the rally in the global markets after sinking in late October 2008, almost 5 month ahead of the lows seen in the US markets. However, the rally has stalled as China’s equity markets have declined by 20.9 percent in 2010. Could the Chinese markets lead the rest of the world back down?
China’s Shanghai Composite Index 2-Year Historical Chart
After a spectacular rise last year, China’s stock market has plummeted on growing concerns about Europe’s debt crisis and expectations that Beijing is about to take strong action to slow the nation’s booming economy and prevent it from overheating, analysts say.
Investors are worried that Chinese exports to Europe will slow in the coming months and that government efforts to tame this country’s economy by tightening credit will hamper a wide array of industries, including the nation’s fast-growing real estate market.
Ran across this article posted in Jumping In Pools. Not sure how credible it is, but allegedly Barack Obama will provide the blueprints for the B-2 stealth bomber to China in exchange for $50 billion in debt relief. According to author Richard Hogarty:
According to the Administration, this proposal will help the United States resolve its debt issues. They point out their belief that the B-2 bomber is "strategically obsolete", according to a source in the White House Press Office. In addition, the source claims that the Chinese would be unable to create their own functioning stealth bomber fleet for "at least eight years."
American allies Taiwan, Japan, and South Korea are very wary of the proposal. Koo Syi, a geopolitical analyst from South Korea, points out that this technology could be passed to China’s allies. This was the case when Chinese nuclear technology was transferred to Pakistan and North Korea. According to Koo, Obama has rendered US allies’ opinions as "irrelevant."
While this proposal is controversial, it is not being presented to Congress, where it could meet with stern opposition. Instead, the State Department has been informed to assisted the Defense Department with the transfer of materials.
A little skeptical here as frankly $50 billion is less than a drop in the bucket of Chinese Treasury holdings which are easily well over $1 trillion. The economic impact of this transaction would be negligible to zero. On the other hand, if this ends up being true, it is quite frightening, as it merely demonstrates, aside from all the scary geo-political considerations, just how bad of a dealmaker our President is.
In other China-related news, Reuters reporting that Tim Geithner’s soothing words from his Beijing whirlwind tour that "Chinese assets are very safe," drew loud laughter from the audience.
"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.
His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country
Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.
It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner.
The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today. The treasury secretary added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.
It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”
The deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion shortfall, according to the Congressional Budget Office.
The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.
Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”
“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said
Yu Yongding is not the only one questioning Geithner’s math. How about it Tim, can we see your scribbles?
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
While the preliminary terms of Europe's Russian sanctions were leaked yesterday, moments ago it was reported that EU ambassadors have reached an agreement on what the "hard-hitting" economic sanctions against Russia would look like even as details remain to still be ironed out ahead of a formal announcement of the final terms next week. According to Reuters, key measures suggested by the Commission include:
President Obama was beating the drums on Thursday in Los Angeles regarding corporate tax deserters, companies that move headquarters or tax shields to another country in order to escape high US tax rates.
An affiliated company of Advanced Semiconductor Engineering (NYSE: ASX), Universal Scientific Industrial, has reportedly received SiP module orders from Apple (NASDAQ: AAPL) for the iWatch according to industry sources, as reported by DigiTimes. Each SiP module costs approximately $60, which is 20% of the iWatch's rumored $300 price tag.
Divergence with small cap stocks and junk bonds persists.
Credit spreads widening suggests building short-term financial stress.
Markets oversold and how risk areas react will be telling.
One of the most widely followed market theories is Dow Theory, which has been around for more than 100 years. The essence of Dow Theory is to focus on confirmations or non-confirmations between the Dow Jones Transportation Average and the Dow Jones Industrial Average for assessing market trends and reversals. If one of the indexes breaks out to a new high while the other does not, we have a non-confirmation and the potential for a market reversal.
Similar to Dow Theory I like to look for confirmation between the stock market and the credit markets. When one market does not confirm the other, caution is ...
Volume in Starbucks options is running approximately three times the average daily level for the stock as of 1:15 p.m. ET ahead of the company’s third-quarter earnings report after the close. Shares in the name are up roughly 1.0% just before midday to stand at $79.95. Traders of SBUX options today are more active in calls than puts, with the call/put ratio hovering near 2.0 as of the time of this writing. Much of the volume is in 25Jul’14 expiry options contracts, most notably in the $80 and $83 strike calls which have traded roughly 3,350 and 2,550 times respectively and in excess of existing open interest levels in both strikes. A portion of the volume in the $80 and $83 calls appears to be part of a spread trade.
Despite a highly eventful week in the news, not much has changed from a stock market perspective. No doubt, investors have grown immune to the daily reports of geopolitical turmoil, including Ukraine vs. Russia for control of the eastern regions, Japan’s dispute with China over territorial waters, Sunni vs. Shiite for control of Iraq, Christians being driven out by Islamists, and other religious conflicts in places like Nigeria and Central African Republic. But last Thursday’s news of the Malaysian airliner tragically getting shot down over Ukraine, coupled with Israel’s ground incursion into Gaza, had the makings of a potential Black Swan event, which in my view is the only thing that could derail the relentless bull march higher in stocks.
Nevertheless, when it became clear that the airline...
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We tried holding up stock prices but couldn’t get the job done. Market Shadows’ Virtual Value Portfolio dipped by 2% during the week but still holds on to a market-beating 8.45% gain YTD. There was no escaping the downdraft after a major Portuguese bank failed. Of all the triggers for a large selloff, I’d guess the Portuguese bank failure was pretty far down most people's list of "things to worry about."
All three major indices gave up some ground with the Nasdaq composite taking the hardest hi...
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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