The market hit some of those intraday support lows, but what was important was how we closed. We saw volume pick up and a strong rally to get above those key levels and that is a hopeful sign that we could see continued support in here. It is not over yet and I suspect we will continue to have volatility into the September FED FOMC meeting, but for now the specter of a rate hike is starting to fade.
Courtesy of wikipedia
Yesterday I commented that China may have ignored or missed the Fed Vice-Chair on Bloomberg, implying that the Fed would NOT be hiking rates. Perhaps I was wrong.
Today for the third straight day, China devalued their currency against the dollar. The yuan now stands at a 6.4010 peg. First day was a 1.9% move, second day a 1.6% move, and today was 1.1%. China said it doesn’t see need for further action, after it’s third straight move.
It is certainly true that the Chinese yuan pegged to the dollar has dramatically hurt their exports and thus curtailed revenue. It would seem logical that China would devalue their currency against the dollar (moving the peg) to help boost exports. However there is possibly another factor at play when we look at the currency war and the big picture.
The Keynesian Way
The West (Japan, Europe, and U.S.) have been devaluing their currency and running zero rates to spur inflation. It has often been said it has been a “race to the bottom”. Taking an objective view (which is quite hard when you earn, spend, save dollars and live in this great nation), the Fed policy is one of considerable long-term risk of the stability and underlying value of the currency and ultimately credit worthiness of the nation. Most would argue with my premise, but most are operating in the blind faith belief as their perspective is skewed living in this nation.
We already see what happens with to cities, nations, territories that follow these Western Keynesian policies – they FAIL (Greece, Puerto Rico, Detroit). The difference between the Federal level vs. states/cities/territories is that at the Federal level they can side-step bankruptcy/failure by just printing MORE money. What would happen without the Fed’s QE, Europe QE, or Japan’s QE type policies – which include printing TRILLIONS of dollars? The nations would fail. Frankly the only difference at the Fed level is the ability to print money and monetize national debt (bonds), by purchasing them with newly printed money.
Courtesy of wikipedia
Is the West Wrong?
This isn’t news to any economist or those operating the central banks around the world. The BRICS (Brazil, Russia, India, China, South Africa) know this, the International Monetary Fund (IMF) knows this, OPEC knows this. When the West first ventured down the road of massive money printing, monetizing government deficits, and expanding the debt, nations like China vocally criticized and leveled concerns. China in fact STOPPED buying U.S. bonds and it got so bad that the U.S. sent Treasury Secretary Tim Gietner and Sect. of State Clinton to China to give speeches and talk to leaders about “Strong Dollar Policies” to ease their concerns.
When nothing happened after QE1, QE2, and later QE3 – concerned died. Perhaps these Keynesian’s radical devaluation money printing policies could work? Perhaps the criticism was unwarranted? Perhaps there is a NEW Government version of math that trumps real math? Of course that is all nonsense, we know that expanding debt, monetizing deficits, and printing more only buys time. The same problems present themselves when we extend bailouts after bailouts, Greece is proof of that. Another bailout, everything seems fine for months or years, then they need another bailout.
Currency War Defined
This is the basis of the currency war. It is really a battle between the West vs. the BRICS, with OPEC (Gulf Nations) and peripheral countries deciding who they will align with and playing both sides.
The West is in a devaluation race with one another, trying to spur exports and attract foreign investments from the BRICS. The BRICS are trying to maintain their leading export status and are taking advantage of the West by strategically purchasing commodities, assets, even seaports and massive transportation. To some extent the West is blind as they are myopically focused on their lethargic economies and ideology. China and the rest are scooping up commodities and assets at an alarming rate.
I don’t like to use the word conspiracy, because it has negative implications and I also don’t toss it around lightly. But after taking careful consideration, not just to the recent events in China’s export numbers, but the bigger BRIC vs. West picture, I think there is more to this Chinese yuan devaluation than meets the eye.
The Chinese yuan has been strengthening in value against the dollar over the last decade as the Chinese allow this peg to move (inch by inch). It makes perfect sense, as the Fed has been running zero interest and printing money. However, this recent strength in the dollar against the fellow Western nations is pulling the Chinese yuan with it. As previously stated, it is certainly hurting their exports and thus national income/revenue.
The big picture is the currency war is the BRICS vs. West. We must remember the BRICS have formally met to plan, design, and decide on a new world reserve currency that would be accepted among the BRICS and then force trading partners to use. In some respects it is similar to the IMF’s Special Drawing Rights (SDRs) that are rumored to perhaps be a new Western reserve currency.
The BRICS need the West to continue with their devaluation race against each other for two reasons: First it makes Western assets cheap, from commodities to properties. The devaluation race allows the BRICS to come in and buy up companies, properties, commodities, ports, transportation. The second reason is to keep the West reliant on the BRIC financing.
Having the Chinese devalue their currency, which seems to be the exact opposite of what I just implied puts pressure of the U.S. Federal Reserve NOT to raise rates, but to maintain easy monetary policies. Remember rate hike will strengthen the dollar and thus make it harder for the BRICS to purchase U.S. assets and will weaken their position. The BRICS need the Western currencies weak.
I find it interesting and ironic that China is making these radical devaluation moves against the dollar, which has certainly sent shock waves into the U.S equity markets, RIGHT BEFORE the Fed’s September FOMC meeting.
It is easy for China to sell this move as to address their internal export concerns, but it can’t be denied that it is certainly putting pressure on the Fed NOT to raise rates. I am starting to believe the broader currency war position of the BRICS is to weaken the U.S. currency.
How does this currency war play out?
BRIC WINS: I think the ideal situation for the BRICS is to ultimately create their own reserve currency and force the West to adopt it. They do this by creating enough inflation (perhaps in the low double digits) in the West that forces OPEC to use their new reserve currency, thus the rest of the world has to follow suite. They could ultimately strong arm the West to convert their currency to their new reserve for international trade. Pretty much saying, do you want that new iPhone that is made in China, well you have to convert your dollars to our reserve currency, because it is only sold/trade in the new reserve currency. The BRICS now control the currency value and the West currencies have to convert to their new reserve currency for trade.
Courtesy of wikipedia
WEST WINS: The West wins two ways, first is to keep the dollar relatively strong, while the Fed is able to slowly unwind their easy policies and raise rates, without creating too much inflation. This is a difficult balancing act as we are witnessing. The second way is the U.S. collectively works with the rest of the West and gets OPEC on board to use the IMF’s SDRs as the new reserve currency. Getting OPEC on board will be crucial.
FALLOUT: Nobody wins if the West loses control of their currencies and we see inflation become rampant. Hyper-inflation drives trading partners underground and OPEC to adopt anything but the Dollar. Eventually the world be forced to adopt the IMF’s SDRs or the BRICS reserve currency. However, this could not only get messy from an economic and trade, it could also bring real war.
Cause for War:
Remember the largest war in history WWII and many wars, are fought over the fundamentals of economics. In WWII, Germany was strangled by the Treaty of Versy that sent the nation into a Great Depression that made the U.S. Depression look like a cup of tea. Meanwhile the U.S. embargo and sanctions against the island nation of Japan (thirsty for oil and resources) strike the U.S. at Pearl Harbor to free up Japanese Navy to conquest Asia for much needed oil and resources. Back any nation into a corner and starve them of oil, food, and resources – they will strike.
Seige Warfare is very dangerous if one can’t contain it. For those under siege will take desperate measures to strike back. Look at Iran and the Iran Deal or North Korea today.
I think economic Fallout is a probability, but a low probability – I think the world will eventually be forced into either a world in which the BRICS control trade and currency or the West is able to hold on and something like the SDRs become the currency for world trade.
These are interesting and precarious times. The markets and economies are being driven by Fed policies and government interventionism. This always happens when nations struggle economically. Are we really to believe that history doesn’t repeat itself?
Courtesy of wikipedia
Support & Resistance
Yesterday’s action saw a strong close that means we could see some follow through today and send this index up to 17,500 or even 17,600. I think the probability is that we are in for a strong rally this week and we could have washed out the panic sellers yesterday morning. Watch the closing session and to see if we close with strength.
I think we could get a follow-through rally today and break above 4550. However earnings has certainly driven some volatility into the mix. Expect this index to remain volatile.
Much like the Dow Jones, this over-sold wash-out action yesterday seems to have built support in the 2080 level. We could see a follow through rally up to 2100 this week. However, there is still volatility and I think 2070 is the support level on any action in the short-term.
The Russell is the only index that doesn’t look as resilient or as strong. 1200 is a key support area and we have seen lower lows and lower highs. We need this index to get above 1210 and then push to 1220. This could be the bottom if we can see the week close out strong and up in the 1230 range.
I had some questions about the IMF and SDRs. The IMF’s website offers some interesting information, including the current exchange rate of the dollar to SDRs. There is also a well written book on the dollar and the possibility of SDRs being the new world reserve currency. It makes sense, but I am not sure it fully counts the BRICS possibly adopting their own.
LINK: IMF’s SDR exchange rate
LINK: Book Death of Money