Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

China’s Doing Yellen’s Job and Creating a Trillion Dollar Profit Pivot

Interest-Rates / US Interest Rates Aug 13, 2015 - 10:19 PM GMT

By: Money_Morning

Interest-Rates

Keith Fitz-Gerald writes: Despite what the markets seem to think and many news sources would have you believe, China’s move to devalue the yuan by 1.9% is not an act of desperation intended to prop up a failing economy. It’s not a surprise. And, it sure as heck is not the end of the financial universe as we know it.

Instead, it’s a brilliant move that singlehandedly changes the investing landscape and creates a fabulous new set of profits if you’ve got the guts and the smarts to make your move.


Today we’re going to talk about why and, more importantly, what makes the situation so very appealing and so potentially profitable at the same time.

As always, I’ve got a few specific recommendations to get you started.

Let’s begin by talking about what Beijing did and why I believe this is a major move that changes the investing landscape.

This is the biggest currency adjustment Beijing’s made in 20 years and it’s the biggest single drop since 1994 when China ended the old dual currency system.

On the surface, the 1.9% decrease in that nation’s central bank “reference rate” is designed to support exporters and boost market pricing in China. Western analysts view it as a threat because it’s clearly more “price fixing” on China’s behalf.

What they don’t understand is that China’s been propping up the yuan for years to guard against capital outflows, to protect foreign currency borrowers and to stabilize the yuan’s role in global trade as a potential reserve currency for the International Monetary Fund. If you think China’s got too much power now, imagine what the world would have looked like today if that nation had not restrained its currency.

Dropping the yuan is actually a means of making room for market-based pricing.

I’ve long counselled that Washington had better be careful what it wished for when it accused China of currency manipulation, specifically because of the kind of reaction that’s happening today.

Contrary to what Washington would have you believe about China’s currency being undervalued, the yuan’s real effective exchange rate has risen by 33% over the past four quarters, according to the Bank of International Settlements. In fact, the growth was so high and so fast that it was the single fastest appreciation move and the highest among 32 major global currencies tracked as reported by Bloomberg.

Dropping the yuan is not only logical, but part of the path China has to take to make its currency fully convertible.

In the old days, China would simply set a peg rate to the dollar that – love it or hate it – was completely arbitrary. Hence the currency manipulation allegations.

But now – effective immediately – market makers who submit prices to the People’s Bank of China as part of the reference rate have to take the prior day’s closing spot exchange rate into consideration, foreign exchange supply and demand, AND changes in major currency rates. In other words, market-based pricing.

This is exactly what’s required by the IMF for reserve status – that a currency be freely usable and market driven.

China’s Attack on the Greenback

The other thing that stands out about this move is that China is doing Yellen’s job. You’re not hearing about that… yet. But you will.

Classic economic theory dictates that a stronger dollar makes U.S. exports weaken, imports cheapen, devalues overseas profits, and brings about a sharp increase in domestic labor cost. By any measure, it’s a restrictive economic policy which is why the Fed has so far refused to raise rates and – with a straight face – been able to sell their zero interest rate policies for so long.

The problem is that sooner or later the markets always fix things themselves.

China’s move immediately makes the dollar stronger. That, in turn, further hamstrings U.S. exporters and worsens the trade imbalance with China. It also shifts the competitive advantage to Beijing.

Theoretically, Team Yellen would have addressed this by shifting the advantage to the United States with a rate increase long ago. Instead, what we got was more of the same – a totally inept sequence of fiscal blunders, stimulus and a “data-driven” Fed that’s scared of its own shadow.

China simply took matters into its own hands.

Washington and New York claim they didn’t see this coming and the headlines suggest it was out of the blue. Not true. In fact, China’s telegraphed this move for years.

For example, Yi Gang, a deputy governor at the People’s Bank of China noted on November 20, 2013, that “it’s no longer in China’s favor to accumulate foreign-exchange reserves.” Zhou Xiaochuan, who was the leader of China’s central bank at the time, proposed “supersovereign currency” that would diminish the importance of any national currency but especially the U.S. dollar in March 2008.

My point is that while Washington views the dollar as a weapon, China increasingly views it as a liability. And, in accordance with that nation’s view of the world, Beijing has simply taken steps to defend itself because our leaders couldn’t or wouldn’t.

So now what?

We’ve actually seen this playbook before, albeit in a different era with different actors. Think back to September 1931, when the United Kingdom stunned the world by eschewing the gold standard – and in the process, caused the pound sterling to plummet more than 30%.

The severe devaluation gave Britain an exporting advantage – until a “me too” effect led other major exporters to take a hatchet to their own currencies. Of course, there’s no gold standard to abandon today, which is a major reason the media have such a hard time envisioning another currency war, even as it happens right in front of them.

This time around, Beijing’s actions firmly shift the global economic balance in China’s favor. Sadly, Western Central Bankers and politicians could have prevented this situation, but that’s a story for another time.

What matters now is how you handle the situation and how to position your money for profits even as most investors will be left behind their own self-imposed “Great Wall.”

Three Plays to Make in the Opening Salvo of China’s Currency War

First, China’s move begs you to “buy” dollars.

The dollar has rallied against all major peers by 20% over the past 3 quarters according to the Bloomberg Dollar Spot Index and this adds fuel to the fire. That’s because the global growth story is all about the Fed, not trade. Remember, it’s the best looking horse in the proverbial glue factory; incidentally, I think China’s move just put Yellen’s rate hike on hold so the party continues.

The easiest way to play this is to buy the PowerShares DB U.S. Dollar Index Bullish Fund (UUP). It’s worth noting that if you already have U.S. based companies in your portfolio, you’ve got this base covered indirectly. So this ETF is really gravy or a complimentary trade to your core holdings.

Second, Apple Inc. (NasdaqGS:AAPL)’s suppliers just got a Christmas bonus.

Apple’s got hundreds of suppliers, but Hon Hai Precision Industry Co. Ltd (2317.TW) catches my attention. It’s part of the Foxconn Technology Group and has more than 1 million workers assembling iPhones, iPads, and other products including PCs, TVs, and gaming consoles.

You’ll have to do a little work to buy it, though, because it’s on the Taiwan exchange. Still, don’t let that deter you. The PE is a low 9.15, according to YahooFinance, and China’s yuan instantly provides a kick to margins that will be related to the upcoming holiday season. Most investors can’t think that far ahead, so they’ll be left far behind if I’m right.

Third, the commodity rebound will have to wait.

Oil, like many other commodities, is priced in dollars. That means it’s going to get cheaper as the dollar gets stronger, barring some sort of catastrophic supplier interruption. That’s important because global growth and global demand continue to increase. Many people are forgetting the linkage, which is why the best oil companies are now priced as if they’re going to go out of business.

One my favorites is a choice that we’ve talked about many times, the Williams Co. Inc. (NYSE:WMB). The dividend is a healthy 4.70% and it’s got billions in capital investment projects coming online, the value of which is not yet reflected in the stock price.

There’s going to be a lot of discussion in the days to come about what this move really means for markets. Most of it, sadly, will be tremendously uninformed and wrong. So don’t “buy” it.

Instead, concentrate on what you now know about the situation and why there are huge profits to be made.

Chinese bears have only been one thing consistently for 40 years… wrong.

Until next time,

Keith Fitz-Gerald

Source :http://totalwealthresearch.com/2015/08/chinas-doing-yellens-job-and-creating-a-trillion-dollar-profit-pivot/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules