Posted by Ray on June 19, 2010 under Main | 
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.
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Tags: central banks, China, currency, Economy, EU, euro, global growth, land of the blind, political posturing, RMB, USD, utter nonsense, weak dollar, world trade, Yuan
Posted by Ray on February 21, 2010 under Economy, Politics |
I was reflecting on events this past weekend trying to put a game plan together and weighing what is going on in the world. I can honestly admit that I do not know what will happen, no one ever really knows, but I do know that things are very uncertain in our world. We are all in the same boat and trying to make decisions that are best for our families, our wallets and our piece of mind. Unfortunately many of the things we are planning for are outside of our control.
It is reasonable safe to assume that our futures never depended more on the decisions that are coming out of Washington, well, at least not since the 1930’s at least. However, Washington is now only one piece of the pie as our world is walking in stride as one. While decisions in Washington directly impact our lives, for the love of God pay attention to what they are doing, now we are also faced with the consequences of decisions that come from China and the EU. Decisions made overseas will have a direct impact on what happens here in the USA and on our investments. Never before have the world markets have been so in tune with each other. In fact, you would be surprised to see that the correlations between all the markets follow each other so closely over the past 6 years or so.
This correlation has really put the efficient frontier and diversification risk reduction strategy into question. In other words, diversification between international and domestic equities might not reduce risk as much as we think, I will get charts to prove that when I get the go ahead to publish them. The irony is that it is not so much markets ruling the day, but politics. The decisions that come from governments now impact the markets much more than you might care to realize. This is important considering that government stimulus from around the world is largely responsible for propping up global growth at this point in time.
Domestically, I was watching parts of CPAC this weekend and was extremely disappointed in what I saw. Granted, I did not watch the whole thing, but enough to know that the R’s, as in Republicans, have no idea what they are doing. Unfortunately, either do the D’s, as in Democrats, know what they are doing either. Both parties fail to take responsibility for their actions and neither party really understands the issues facing the country at this point in time. Sure, they talk a good game about fiscal responsibility, but neither is serious and, frankly, the R’s have grown government way more than the D’s have over the past 30 years. In fact, Ronald Reagan had grown the deficit by a whopping 189% yet we credit him with being a fiscal conservative, huh?
While many of you may think I am a right winger I am not, I am a political atheist. It is not that I do not take a stand on any issues or beliefs I have just come to the conclusion that the party I would belong to simply does not exist at this time. If I were to align myself with any party it would be the Libertarian Party on the strong money principle, but I also recognize that the free markets will never be able to regulate themselves. The proof of this was 2003-2007 as the free market rolled on and some Einstein somewhere thought it would be a good idea to push no document loans to anyone who would be foolish enough to take one. You cannot honestly tell me that these incredibly smart people did not know these things were bad loans at the time. They knew and they also knew that they only needed a couple multimillion dollar bonuses to be happy.
My point is that we have no real political leadership and they simply are pushing what they believe is the right policies. However, they do not know what they do and they do not understand that the problems facing America are those silly policies to begin with. To them, though, it is all about reelection and keeping their power, if that is not a true statement then we would have had term limits on Congress instituted decades ago, but we don’t. It comes down to the real fundamental problem in America is that we do not have the will to make those tough decisions. I really believe that the products we buy demonstrate our beliefs and we have way to many “I” products being bought which means we all only care about ourselves.
All of this adds to the uncertainty that I feel and the feeling I have in my gut is growing by the day. There are so many problems out there that are not being addressed and when we do address them we simply throw billions of dollars at it which merely wallpapers over the roots of the problems we face. The very problem that we have is that we are waiting for Washington to solve our problems. How can we expect self serving Congressman or Senators to solve the problems we face? Half of them are multimillionaires and the other half are probably on the take somewhere along the way. Yet we trust them to solve our problems or understand the average person, good luck with that.
I watched this weekend as former politicians lambasted Obama while they ignored their roles in the problems we have. I watched them blatantly distort the facts about where we are and how we got here, sorry folks, but it took a whole lot longer than 1 year to get to where we are. I watched them roll out with no new ideas or inspirational speeches and I distinctly got the feeling that they simply think that because they have an R in front of their name they will get elected because they are different from the President’s party. Maybe they will, but I think it will be much harder than they think because 10% unemployment, 18% by U-6 or much higher if we re-add the people the BLS removed from the labor force, is a real problem that both parties have to take responsibility for.
On top of the domestic political uncertainty we have global uncertainty. We have Europe in or on the brink of a major crisis with the PIGS. We have China who is really upset over us, do you blame them (?), over selling weapons to Taiwan and the Dali Lama, not to mention the mini trade war we have brewing. China is also taking their stimulus off the table, or so it appears, along with India. Those economies play a huge role in the global growth story and if they are tightening their belts this is a problem for that story.
Finally we have Iran, of how I love the nut jobs in Iran, whose leaders are actively seeking to become a nuclear country. While they technically are a nuclear country they want to take this to a much higher level with missiles and warheads. Call me crazy, but I have a real problem with a country that has loose cannons running it and they have reached a level where they have nuclear fuel along with a missile that can reach orbit. Sorry folks, but the story about the mouse they launched into space was not about a mouse and it shows their intentions which should make us all very nervous. Thank God I do not have to make policy decisions about what to do about them. I just hope Obama and company make the right decisions in regards to handling them.
All of this uncertainty is not being felt by me alone, but by millions of people. There seems to be no end to it and as each day passes more uncertainty gets added to the fire. The odd thing about this is that the markets just do not care. I guess when computers trade some 60% of the volume on the exchanges, according to CNBC, the uncertainty does not matter. Regardless, it is clear that no matter who is in charge or making the decisions their options are becoming very limited and the outcomes are all looking the same. The best case scenario I foresee is massive inflation and dollar devaluation, over a few years time, and the best case scenario is massive inflation and dollar devaluation.
As I stated earlier, the only thing we can do is pay attention to what is going on and make the best decisions we can for ourselves and our families. I have several friends, smart people I might add with CFA’s and MBA’s, who are leaving the country or adhering to the guns, gold and God philosophy. I have honestly never seen such smart people head for the hills like this before. I am not in that camp, although I do love gold and precious metals, but they might just be right. However, it is possible, I guess, that all of this uncertainty will pass by and everything will be fine, but mathematically speaking, well, I give that a very low probability.
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