“ In contrast, the Asian FX complex is selling off. Risk assets are not responding to this week’s apparent good news: the Chinese peg announcement (has anyone noticed that yuan forwards are actually …. weakening?)”
Whether this is a real trend or not is unknown, but I fully expect the yuan to appreciate before it really falls anyhow, gotta get Congress off their backs for now. No matter what a strong yuan is not in China’s interests right now and China’s ruling party wants to remain the ruling party so are they going to fear Congress or a billion Chinese storming the Peoples House? You get my point.
To further make my point about the troubles in the EU and in China, moreover how this is a global issue now, Rosenberg went on to say:
“ There are all sorts of news reports in today’s FT discussing how the problem countries in Europe are in such bad shape that their banks are increasingly relying on the ECB for their funding survival. Portuguese banks reportedly doubled their borrowing from the central bank in May as a sign that this is not just a Greek tragedy. We have reached a stage where countries representing 18% of Eurozone GDP is accounting for 68% of the growth in ECB funding. Is that a currency you really want to own?”
What does all of this mean? It means big trouble and the markets are telling us that the problems from around the world are about to wash up on our shores. The irony is it is all coming full circle because we kicked it off with our credit induced sugar coma over a 5 year period which made risky paper seem safe and led foreign banks to buy it. Later everyone found out that safe paper was worth far less than the paper it was printed on and the write downs, globally, were enormous, with more to come. That triggered a collaborative global bailout of the entire financial system, but the ones who funded the bailouts are now in trouble and the recipients of the bailouts were never really in such great shape even after they received hundreds of billions in aid.
While we allowed our banks to extend and pretend, mostly because we have the luxury of printing our own money and we are the reserve currency, foreign banks bought seemingly safe sovereign government debt instead of treasuries, for the obvious reasons. Well, that debt became no good and we are where we are with a potential funding problem across the pond and a healthy exposure to European banks. We had exported our “safe debt” which ended up being toxic to the Europeans and they, more or less, did the same thing to us! Except theirs was disguised as safe government paper instead of CDO’s and CLO’s.
I believe the proper name for such a thing is “circle jerk,” but I am not 100% sure on that. Either way it is definitely heading this way and only a fool would deny that fact. In today’s world it no longer matters if a problem starts 10,000 miles away because everything is handled via the internet in microseconds and exposure can go from nil to billions in the blink of an eye. All this means is that we are exposed and the market knows this. Why else would treasuries be doing what they are doing while gold is rising and stocks are declining, the interesting thing is the stocks declining part is new and all 3 were once going up at one time, how odd. All 3 asset classes could not be right, but 2 out of the 3 asset classes were bearish for stocks so directionally speaking a downward move should not be overly surprising to anyone, but it is, interesting.
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.
I have written numerous times about the brewing trade war between the U.S. and China with many people thinking I was crazy. Well, it appears that this thing is escalating with the esteemed Paul Krugman weighing in on the issue, in a very unusual way. I am sure everyone is aware of Krugman’s political leanings, he is a bit left of center, and is a full blown Keynesian. While I am far from a Noble Laureate, actually I am nowhere close to ever receiving such a prize, but I am capable of doing nothing so you never know, but I do know what a street fight looks like and there is one brewing.
It all started many months ago over allegations from the U.S. of China dumping tires on our market, which is probably true, but during a recession I am not going to complain about cheaper products. It then escalated as China began to look into chicken products being imported from the U.S. From there it has just gone downhill with seamless pipes to automobile complaints. However, the one thing that has never stopped is the current administration, from its very beginning, has called the Chinese currency manipulators. Of course, Chuck Schumer, who would kill to get air time, literally, was weighed in on the issue as well.
Far be it from me to pick on a man who has never held a private sector job and knows as much about economics as my 10 year old, but Chuck is out of line. Krugman is not helping by saying that the RMB or Yuan is undervalued by 25% and the U.S. should place a tariff of 25% on all Chinese imports. Schumer points to this as validation of his mythical point, but I see it as one nut job helping out another. Regardless, Schumer and a few other Senators have sent a letter to Treasury demanding that the Chinese revalue their currency. This is all to save U.S. jobs and boost our exports, but it is protectionism at its worst.
Schumer and Krugman believe that we have the Chinese right where we want them, they own a ton of my debt and are very angry with us. Oh, I forgot to mention that we are heavily dependent on the Chinese to buy our debt to fund out current and future deficits, but that seems to slip Krugman and Schumer’s mind. I always hate pointing out the obvious, but if we need money and our largest creditor starts to cut you off that is a recipe for disaster. It is not the selling of the Chinese current treasuries that we should really worry about, well, we should worry about it, but not really, it is the future purchases of our debt that we need them for.
There is no doubt that the Yuan is undervalued, but who knows by how much and they need to raise its value anyhow to fight inflation. However, I have seen that the Chinese do not like being told what to do by the U.S. and payback could be a problem for all the ridiculous political posturing. Essentially, we want the Chinese to increase the value of their currency, which is pegged to the dollar I might add, making their products more expensive in the U.S., see the protectionism yet (?), so the Chinese will buy more of our products. In Schumer/Krugman land this will lead to massive U.S. corporate job growth and a return to prosperity, but reality is very different from fantasyland.
What will happen is the U.S. will begin to import more products from other countries where the dollar goes further, like Brazil, India, Indonesia, Pakistan, and a million other places. That means the job situation here will not get much better and other economies will flourish. Of course, Krugman/Schumer will then demand that all other countries increase the value of their currencies as well, it just will not work. John Mauldin brought up a great point, we tried this in 1971 with Japan, as Krugman points out, and what happened was the Yen dropped from 350:1 to, now, 90:1 and what happened to Japan’s trade surplus? It went higher because the Japanese save their money, which if we saved our money it would be the solution to our trade deficit issue I might add. It did not work in 1971, really, and it is not going to work now because people will continue to buy from China because they like the products or they will find comparably cheap products made elsewhere.
Mauldin brings up another point, Canada’s Loonie is almost at parity with the USD so why shouldn’t Canada hit us with a tariff as well if this is the game we are going to play? Of course, this wouldn’t happen because we love Canada and they love us, I think. The point is that this is protectionism, pure and simple. It is a very dangerous path and if we follow it we may find ourselves in a Smoot-Hawley situation. I am not sure why Krugman doesn’t see it that way and maybe I am wrong, after all I am not a Nobel Prize winner, but like I said I know a street fight when I see one. This is turning into a street fight and we do not have China right where we want them.
It is possible that China would, this is highly unlikely, sell their treasuries to burn us if they get angry enough. The military already suggested using our debt as a weapon against us and it would work. Sure, it would hurt them, but you know what? Mao killed 70M of his own people, I am pretty sure they could like with losing a few billion. Plus, if they take down more gold they are hedged, kind of. It is not that I am taking China’s side on this, I think they are in the wrong, and I do not think they would blow up their treasury portfolio, I am just pointing out what they could do.
We can make the argument that they need us and they do, but if they do not increase the value of the Yuan and we impose a 25% tariff on all their products I am pretty sure all bets are off and they would have to learn to live without our business anyhow. Keep in mind, China’s trade with Europe and Japan is climbing rapidly. While we are the biggest market in the world they can survive by moving deeper into those markets along with other frontier markets and Africa. The other thing you have to remember is that China has been buying resource companies over the past few years, so they have been moving away from treasuries anyhow. Finally, perhaps we should look at our own dollar situation before we pick on china. If we had taken care of our currency to begin with the Yuan would be stronger anyhow.
Everyone is on bubble watch nowadays, me included, as central banks flood their respective countries with mountains of money. While the US has done a ton of printing of dollars it is often overlooked that the Chinese have also printed a ton of Yuan as well. While there are definite differences in the economies of the US and China, we could argue those difference all day long, the one thing we could all agree on is that China a lot of flaws in its system. I would counter by saying their flaws are probably pretty severe, but no worse than the US.
Regardless, I have been reading a lot about the bubble in China, especially in their real estate prices. I do not doubt that as property values have gone parabolic in the country, some areas make the peak price increases in the US look like pathetic in comparison, but is it the same bubble that the US had? The answer is, no one really knows for sure because the data is spotty at best. My guess is that the price bubble is probably worse than the US, but I am willing to bet that mortgage fraud, home equity loans, securitization and the host of other issues that basically collapsed the world economy are not the same, at all.
So, at the end of the day, we will see a price collapse in China which will lead banks to have losses on their books, but it will end there. It will likely be as bad as the early 1990’s in the US banking system compared to the 2008 collapse that the US had and it will more than likely not spread globally like the US credit collapse did. However, it is problematic for the world to have the second, it surely has beat out Japan by now, largest economy approach a huge bubble so early in its quest for world domination, especially when it is the manufacturing center of the world.
If the bubble pops, which it will, it will take capital to fix which means that money will not be loaned out to manufacturers. When that happens the cost of capital will increase driving up prices which means your trip to Walmart will not be as cheap as it once was, especially if Washington forces the Chinese to strengthen its Yuan as well. That will be a problem for us and the rest of the world as China led the world out of the recession, if you believe it is actually over that is, so if China contracts it will lead the world right back into a recession, or make the one we are in even worse.
It is just interesting that Americans always assume that everyone acts like they do and spend all of their money. The Chinese are fanatical savers and it is highly unlikely that they would leverage their home, i.e. home equity loans or lines of credit, to buy junk they simply do not need like Americans do. I remember when Lay’s potato chips were trying to make headway into China and one women interviewed said why would I spend that kind of money on that when the same money can buy me potatoes for a month? That is their mentality and they do not spend what we do not have and pay for it later like what we do, that is what I admire about their culture. This is why if or when the bubble pops it will be a major problem, but nothing like what we saw here or in Europe.
With that in mind I am not crazy about investing in China because I believe that the bubble will pop and it will slow their growth down dramatically. Depending how the government handles the issue it could be a nonevent or a huge problem with, believe it or not, political instability. Plus, so much money has flowed into China through BRIC’s it is kind of crazy to keep money there right now. I am way more interested in India and Russia than China and Brazil, but all emerging markets have me a bit nervous because when everyone agrees that is where you should be, well, you know, do the opposite. Regardless, I believe the bubble will pop, but before the China bubble pops the US equity bubble will pop first.
According to Bloomberg, some in Vietnam will no longer accept US dollars and prefer the Chinese Yuan. This in itself is not huge news, it is only Vietnam, but you add that to the rhetoric from China, India, Russia and the fact that China is allowing 6 major corporations to settle trades in the Yuan versus the US dollar it is troubling.
This is how it starts, countries want settlement in different currencies other than the reserve currency and it spreads from there. The primary reason they want the Yuan, in this case, is because they feel it is less risky than the dollar. That is scary when communists are afraid of the risk of the dollar and want to settle transactions in their own currency.
Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.
Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.
“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”
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