The media is abuzz with China’s central banks decision to allow the RMB to float a bit more freely, but no one is asking the more important question, which way will they let the currency float? Everyone and by everyone I mean certain U.S. Senators and some White House officials, claims that the artificial weak currency has cost Americans their jobs. The claim is it has cost millions of Americans jobs, but the it utter nonsense and political posturing.
A weak currency definitely gives China an advantage, it gives any country an advantage, but at the end of the day China had their currency pegged to the U.S. dollar, so perhaps our political officials should have been looking in the mirror while throwing criticism towards China. In other words, if our currency was stronger it stands to reason that China’s currency would be stronger as well. However, we all know that the intention of the U.S. government is not to have a strong dollar, but to have a weak dollar. That would mean a weaker RMB which would give China an advantage, in the eyes of those living in the land of the blind, in world trade.
How do we know the U.S. wants a weak dollar? Simple, Obama told us. He wants to double exports within 5 years, but we have the most expensive workforce in the world and are largely viewed as inefficient because of our pesky workers rights laws. That makes producing goods in the U.S. for export very difficult with the exception of complicated financial instruments, bombs, military hardware and some technology items. Let’s look at producing hammers, a hammer made in the U.S. would cost about $10, but a hammer made in China would cost about $5, why? Labor costs. The steel is going to be about the same and they are shipping the steel to China and the final product from China to the U.S. at half the cost. They pay the same amount of money for transportation, energy and raw materials, but they pay less for labor. My point is that we cannot export more without severely devaluing our currency or our standard of living.
Which brings me to my next point, China’s willingness to let their currency float more freely, great, but which way? One of China’s major manufacturers, the one were all the people are killing themselves, you know, Apples plant, is raising their workers’ salaries by 14%. Now, forget that 14% on $2 an hour only means another $.28 an hour, but that is a significant increase in labor costs, but are your iPad and iPhone costs going up? No, as an aside, this is just one more reason that I feel good about not owning an Apple product. I have also said that the Euro’s collapse is a significant issue for China, it still is, and a further decline in the Euro means China’s #1 importer of goods will import less, much less from the big red giant. What I am saying is it is entirely likely that China will float their currency lower and now they can claim it is the free market doing it, smooth move if you ask me.
It is not possible for China to have a rising currency, a weakening Euro, a weakening USD and higher wages for its workers with most manufacturers maintaining profit margins of 3%. It just doesn’t work for China and we all know the ruling party wants to maintain its power and in order to do that it must make the people happy. Without plus 8% GDP growth unemployment will increase and discontent will grow threatening the powers that be. In other words, the RMB will go lower unless other currencies increase in value. I realize this is an outside the norm view, but if one steps back and looks at the bigger picture it makes sense.
I could be wrong and perhaps every firm is out there hedging their currency, but that is highly doubtful. Even if they did it would not stop the slowdown in exports and all the bubbles in China will pop at roughly the same time, in the next few months. It is funny that the same people who said the U.S. was not in a real estate bubble in 2006 are saying China is not in bubble territory now, they are. Any slowdown, even a minor hiccup is extremely dangerous and has worldwide ramifications. We are talking about the engine of the “worldwide recovery story” here, not some small corner of the world that does not matter. If their currency appreciates and the slowdown is bigger than anticipated, they always are I might add, there are no more surpluses, no more U.S. debt auctions to show up at and prices will head higher on products.
It also means that they may become net sellers of treasuries instead of buyers, that is not good news, if their currency does appreciate. However, it won’t happen, it will go lower and everyone will be surprised when it happens, except for me. It is clear as day that the Chinese economy is showing extreme signs of stress, look at their markets, they are way off their highs and have been for some time now.
From my lens the entire system is in major trouble and it is evident when we try to find scapegoats for our problems, bankers, the Chinese with their cheap currency, etc. The system needs to reset itself and it cannot happen with all of this intervention and additional debt. Everything needs to be restructured and debts need to be purged from the system, but this will never happen as it means everything goes to zero. Instead we will carry on blaming others, inflating our way out and causing much more pain than by having an absolute reset.
Those who read my material know that I am a bull on precious metals and have been for some time. The main reason is because over the long-term the Federal Reserve intentionally devalues the dollar, its buying power is down some 95% since 1914. The most recent reason to be bullish on commodities as a whole is because of Obama’s plan to double exports within 5 years. This is a lofty and unachievable goal unless you plan on devaluing the dollar. Based on our debt load the devaluation of our currency will happen whether we like it or not.
I have been more bullish on silver and palladium over the recent months. I started buying silver at $9/oz and palladium at about $230/oz so I have hefty gains already, but I believe this is only the beginning. With both of these metals you are playing both a global recovery, which I see happening, but not as robust as the talking heads claim, or if you believe the world is going to end. Either way, you should own these metals, perhaps wait until they selloff in the near future, but nevertheless, why wouldn’t you own them?
Silver is used in almost everything you have in your house, from your TV to your cell phone. Silver is also going to be under tremendous pressure in the near future as the global population grows and people are lifted out of poverty because everyone wants a cell phone, computer or even a mirror, yes silver is used in mirrors as it is the most reflective metal in the world. Silver is a dual purpose metal as it is used in industry and as a store of wealth. The Chinese and Japanese used a silver based currency in the 20th century along with the U.S. as a bi-metal currency. Regardless, whether you think the world is going to end, own silver, or whether you believe in a global recovery, buy silver. Surface supplies are dwindling and all the easy silver has been mined. Combine that information with a growing population and we are bound, rather soon I suspect, to have a shortage in the supply/demand curve. Silver is an easy sell.
Palladium has been on fire lately moving up from $420/oz to $545/oz as of today, it was up $25 today alone! Palladium is used as an industrial metal first, mainly in catalytic converters, but it also is used in jewelry and as a precious metal, it was only recently that this usage has grown. Palladium is also a “green metal” as it can be used in several clean energy items, hydrogen cars for example. In short, it is a cheap alternative to its bigger brother platinum. Believe it or not, palladium is rarer than platinum and the largest world supplier of palladium is Russia.
I personally believe Russia is a pretty volatile place, I think history proves that point, which means the supply of palladium can be reduced if Russia throws a temper tantrum. There is always the possibility that Russia does something we do not like, like go to full war with Chechnya or invade Georgia, the country not the state. We could also upset Russia as well by invading, say, Iran, North Korea whoever which could create tension between the U.S. and Russia which could lead to less exportation of palladium to the U.S. If that happened prices would go through the roof.
The big story with palladium is the growth of automobiles in India and China. Between the 2 countries there are over 2B people who are being lifted from poverty to the middle class. As they ascend from poverty they will want what we have, cars. This means lots of catalytic converters in lower cost cars. Ultimately this means they will use less platinum and more palladium, regardless of where it comes from. All of this is a bull case for the metal and I think it could go much higher over time.
I believe the metal will be volatile, silver as well, because of the ETF’s designed to buy both metals. These ETF’s are likely the reason we see prices climbing recently so it is tough to know if the demand for the metals is organic or artificial, for investment purposes. Eventually people will sell PALL or SLV which will cause the prices to drop and that is the time to buy, IMHO. Also, if the dollar strengthens, which is what I think will happen, prices will drop then to. However, long-term I believe both metals are the trade of the century.
I am in no rush to sell what I have and am an active buyer, even at these levels. If you do a Google search for palladium coins or bullion you will see the supply is tiny. You can get palladium bullion, but you will pay a hefty premium for it. This is because supply is so limited and, as we know, you cannot just make more natural resources so the supply is finite. The price action is very exciting to those of us holding the metal already and what I like is the media never pays attention to either metal, never palladium though. Today with a 5% rise in value, no one said a thing, but if it was gold we would hear all about it, mostly negative things and gold bug jokes.
Silver and palladium are no joke and one should consider owning them. At the very least it is diversification especially if you own PM’s already. I am sure there is a bear case out there for both these metals, but I cannot find one that is reasonable.
Today was a bit odd in the markets as they sort through the Greek problem, along with the upcoming PIIGS issues, and a so-so initial claims report. The dollar started out strong and then sold off as anxiety subsided about Greece, but don’t kid yourself as the problems are just getting started. What is interesting is the dollar correlation trade is back after being somewhat broken for the past couple of months. Frankly, the dollar correlation to the markets makes so little sense it is just plain bizarre as the gains of a weak currency are so short-term and on a longer term basis it is simply just bad for everything.
Regardless, you cannot argue with something that is clearly working, but as the EU’s issues expand it is sure to send the dollar higher after it takes a little breather here. Longer term the dollar is going much, much lower, its not political it is simply mathematics that dictate that fact, but President Obama confirmed the dollars fate. During the State of the Union address Obama said he wants to double exports, a feat that can only be accomplished if you actually produce something or you devalue the currency. The US does not produce many real products as compared to China or other Asian countries, our largest exports are financial products, bombs and heavy equipment which is vastly different than producing, say, hammers which is what China makes.
In other words, our exports are for select industries or institutions and not for the average person. I am not saying we don’t produce things for everyone, but we do not produce enough things for people to double our exports over 5 years. If we get our manufacturing sector back, meaning more than 11% of GDP, we may have a chance to boost exports. However, the US is not competitive in manufacturing as our labor costs are through the roof compared to Asia or Mexico which reinforces the idea of a massive dollar devaluation in the future, a weak currency would make our products competitive worldwide. Essentially, we are a service oriented economy and you cannot export services. If we could double exports that would be fantastic as jobs would be much more plentiful, but I digress.
The US is still losing jobs at a disturbing rate as we are now some 2 years into the recession which should show everyone that this time it was indeed different than past recessions. While we posted high GDP numbers for the last 2 quarters the growth was based on government stimulus and an inventory rebuild that is quickly coming to an end. With some 8 million jobs lost from this recession there is little chance of unemployment coming down for a very long time, unless the BLS continues to take individuals out of the system like they have been. Some estimate that is could take 8 years for the US to regain full employment and that is with a reasonable growth rate, which we are unlikely to actually have.
The employment picture is simply not improving like many pundits claim it is, there are 6 people chasing every job opening. Hiring’s are also not lived up to expectations either as many firms are still laying people off versus rehiring them. It is scary to think that we have 0% interest rates, some trillion dollars in government stimulus and the Fed has a $2T balance sheet with unemployment first time claims still above 440K a week. I will admit that the stimulus probably did help soften the blow with unemployment, nowhere near as much as the administration claims, and the jobs are temporary at best which does nothing to really help the employment picture. We spent a ton of money for well below average results which is really bad news as the annual budget deficit is hitting 10% of GDP and the national debt is just sky high.
I have little hope that any jobs bill will actually work at this stage of the game because there simply is just no end demand for products. Without end demand who is going to hire? Things are better than they could have been, so they say, but I am convinced that if we let things run its course we might be further along than we are now. The depression of 1920-21 was a quick sharp contraction which ended as quickly as it began because the government did not follow the Keynesian method of stimulus. Massive spending is stealing from the future and when you are heavily indebted country it is a recipe for disaster. In other words, I believe that we should have dealt with the blow and let firms fail in 2008 and we might have been closer to the end by now than the middle.
If we look at the effects of the governments intervention we would see that they are making problems worse, not better. The housing market is still declining versus being at the bottom if we did not try and prop up demand. Unemployment may have been much worse if we did nothing, but I am sure that once all the junk was out of the system it would be going up by now versus being stagnant and, in my opinion, on its way to the bottom. Government intervention merely kicks the can down the road and steals from the future. We can see this playing out in the PIIGS now and we can also see what a heavily socialized government, meaning universal health care and liberal social programs, creates huge financial problems and eventually will cause countries to fail. The US is not far behind the PIIGS even though most believe “it can’t happen here,” it can and will as we set the course and it there is no way to stop the insanity of our government. Both parties are to blame.
So, watching Venezuela, with its currency devaluation, and the PIIGS with their fiscal largesse is telling of what will more than likely play out in the US. That statement is not political, it is mathematical as there is no political will to do what needs to be done. Don’t get me wrong, I do not enjoy preaching lower entitlement programs and reduced benefits, but tell me what choice do we really have? Raising taxes would work temporarily, but not permanently as higher taxes drive capital away from countries and people learn that making less may mean more take home pay. The irony is that we all saw this coming and were forewarned by many credible sources, but we did nothing to prevent it. Essentially, we kicked the can down the road for a fix later and it is now later with leadership who has no idea how or what to do about our troubles. This could get very ugly, very fast.
The term “Black Swan” is used far too often in today’s discussions about the financial markets and it pertains to unforeseen events that cause havoc on the economy or the markets themselves. Last year was called a “Black Swan” event even though the warning signs were there for at least a year, some say since 2006. In today’s discussion the news coming out of Dubai is being hailed as another Black Swan event as they are talking about delaying payment on some of their debt on December 14th.
The events in Dubai is the furthest thing from a black swan event as we have all known about this problem for the better part of 6 months or more. The country is in poor financial shape and is, basically, insolvent without a bailout from its neighbor Abu Dhabi, the rulers of the two nations are related. I would be willing to bet that the bailout will come in some fashion, but only after an example is made of the smaller nation, but is this a black swan event? What is more a more relevant question is will a technical default on Dubai’s debt be a trigger for something bigger?
I do not believe that the Dubai situation is a black swan event as it was a known situation for some time and those who lent the country money knew they were way over leveraged and lent that money at their own risk. Whether or not this default, if it actually happens, will lead to other events, a domino effect if you will, remains to be seen. Since the sub-prime situation led to a domino effect in the mortgage market it is safe to assume there will be some fallout from a sovereign default somewhere along the way. Considering Mexico was downgraded to BBB and Vietnam raised interest rates and devalued its Dong by 5% there are definitely trembling in the FX markets that cannot be ignored.
The effects of these issues are unknown to me at this time because I do not know how China will respond, although I have my speculations, nor do I know what exposure US or European banks have to the Middles East at this stage of the game. I am willing to bet their exposure, especially JP Morgan, BoA and Citi, is much higher than we all think at this stage of the game since interest rates in that area of the world are much higher than the “norm” in the US and Western Europe. However, the real black swan events that I think are being ignored are the ones in Eastern Europe where currency devaluation and real sovereign default is actually happening and has been happening for some time now. Not that you ever hear about that from the media, but read about it sometime in European blogs or news outlets and it is disturbing.
Basically, I believe the greenback will have the stay of execution I have been expecting for some time now and it should rally nicely on this possible default news. In reality a Dubai default means very little to the US other than it is a sovereign nation defaulting, but it will trigger a flight to quality which means if the dollar equity trade is intact the market could be in real trouble. Further pressure for the greenback is coming from Japan who said it was concerned over the Yen’s strength last night in a Bloomberg story. This is an issue I wrote about a day ago as well, but essentially the Yen is up about 8% against the USD which is an issue for the Japanese since they export more goods than they import. A strong Yen is not good for them as it means their products will be more expensive in the US and China, expect to see Japan intervene in the FX markets to strengthen the USD/JPY pair, IMHO.
This puts the US at odds with its trading partners because while we talk like we want a strong currency we do not. A weak currency means we make our products cheaper overseas, narrow our trade deficit and essentially boost our GDP in a very phony way. As an aside it also makes corporate profits look fantastic if they generate any overseas business as a weak dollar means they can sell the same amount, or less in fact, and when those earnings are turned over to US dollars it looks like sales increased when they did not, Houdini earnings! We will have to see who’s will is stronger, the will of investors who are about to flee to the USD for protection which will surely drive up the USD or Helicopter Ben and our Congress hell bent on devaluing our currency to pay for their crazy social engineering and to make it look like they are leading us to recovery when they are really leading us to a Zimbabwean fate.
Be the First to Comment 
Subscribe to Annuity IQ's Feed
