• China’s devaluation of the Yuan is a huge story that will ultimately reverberate through the currency worlds – most heavily in the U.S.
  • The media has got this story wrong
  • Ultimately this will represent a revaluation upward of the yuan against the dollar
  • The markets have fallen to a 4-year low in the days immediately following China’s decision to devalue its currency
  • The media is spinning the decline in the global stock market, particularly in the U.S. on the devaluation of the yuan
  • The stock market was already experiencing a 7-day losing streak prior to China’s announcement
  • The real reason for the decline was because concern over a Fed rate hike, falling corporate earnings and the realization that the economy is slowing down
  • The Chinese devaluation is just Wall Street’s manufactured excuse for the decline
  • The spin is that Chinese is igniting a currency war which will ultimately be bullish for the dollar
  • This is not the case
  • The dollar’s substantial rise over the past few years is a dollar that is going to burst
  • Because the Chinese yuan was pegged to the dollar, it has gone along for the ride
  • Chinese are not concerned with the exchange rate with the dollar, they are concerned with the yuan vs all other currencies
  • It was not a problem for the U.S as the dollar strengthened against other currencies and those currencies have collapsed
  • The yen is down about 35% against the dollar
  • One of the primary reasons for the so-called currency war is the strong dollar
  • Other countries have been at a competitive disadvantage exporting to America and have felt pressure to weaken their currencies
  • When the dollar was getting clobbered following QE1, QE2, it was weakening it was weakening against every currency in the world except the yuan, because the yuan was pegged to the dollar
  • Recently the yuan went up with the dollar and other currencies went up with the dollar
  • This put Chinese goods at an advantage in the U.S. market and China accumulated massive foreign exchange reserves in an effort to maintain its relationship with the dollar
  • All the currency wars were the result of relationships to the dollar
  • This is the real watershed event: China wants its exchange rate to reflect its own fundamentals, moving with other world currencies
  • Think about what happens when the dollar bubble bursts
  • The dollar’s rise has been tied to the expectation that a growing U.S. economy will prompt a normalization of interest rates
  • That is not going to happen: If the Fed does raises rates, the U.S. economy is headed back to recession – officially – unofficially we have been in recession all along
  • Or, the Fed realizes that a rate hike will spark recession and will go directly to stimulus
  • Either way, the dollar will collapse when that realization hits the markets
  • Now that China is committed to a more freely trading yuan, the next time the dollar starts to fall, it will fall against the yuan
  • The last time the dollar fell, China loaded up on U.S. treasuries in order to maintain its peg to the dollar
  • This was a windfall to America because we had a huge buyer at a time with the Fed was selling treasuries to stimulate the economy
  • The next the dollar is weak, the yuan will be valued upward to reflect other currencies
  • China signaled its intention recently when it reduced its official holdings of U.S. treasuries
  • Also, Chinese are secretly buying as much gold as possible
  • In terms of the yuan, gold prices have surged recently in China
  • Chinese investors are showing their preference to gold as a safe haven
  • The yuan relationship to gold will be the leading indicator and the dollar relationship will follow
  • Bloomberg recently commented on the recent reduction of Chinese demand for U.S. Treasuries, indicating there is nothing to worry about
  • Bloomberg says we have so many other buyers for out treasuries, we don’t need China
  • Talk about whistling past the graveyard: The other treasury buyers are speculators – no one is buying to hold to maturity
  • The next time the dollar goes down, especially with Keynesian response to a U.S. recession and existing bonds maturing, who is going to buy our low-yield bonds if China is not there, ?
  • Nobody!
  • If the Fed actually raises rates, U.S. bond prices are going to collapse
  • Who is going to buy bonds if they are going into a bear market?
  • The solution to this problem is going to have to be another round of QE
  • This is the big story that is buried beneath the headlines: China is paving the way not for a weaker yuan, but a stronger yuan
  • When the dollar bubble bursts, it will fall precipitously against every currency in the world including the yuan
  • Before the Chinese provided a buffer
  • This time when the dollar falls, China will feel pressure to strengthen its currency
  • The primary beneficiary of the fixed exchange rate was America and it allowed the U.S. economy to live beyond its means
  • Chinese will now enjoy more of the fruits of their own labor, and Americans will no longer will be riding on the Chinese gravy train
  • When the dollar collapses against the yuan, the Americans will no longer enjoy cheap Chinese products
  • The markets have been buying into the idea that zero percent interest rates and QE were temporary crutches
  • What the Fed actually did was cut the legs out from under the u.s. economy and replaced those legs with artificial limbs
  • QE and zero percent interest rates are the legs upon which the U.S. economy is walking, and it cannot go forward without them now
  • We are completely crippled without QE and zero percent interest rates
  • Then the markets figure this out, the bottom will fall out of the dollar and it will also fall out against the yuan
  • That is the real story that no one but me is talking about