No-Brainer: Buying Yuan / Asia / EM and Selling Dollar / Euro / XLF

By Jim Wiandt

Let me join the market-timing and macro-vision bandwagon on this one, alongside Matt Hougan.

For all of the fundamental reasons that you mention in your blog and that Roubini has listed, I wholeheartedly agree. It's always a good idea to be aware of what's going on in the world, and to every extent possible, to get the fundamentals on your side. And as I've long discussed in this blog, the fundamentals of the U.S. dollar are terrible. You've got the towering twin deficits of current accounts and trade in the U.S. coupled with an ever-increasing federal deficit and the fact that China basically owns the U.S. now.

Indeed, the only thing the U.S. has going for it right now is that the global economy has been going to hell in a handbasket. And de-leveraging and the flight to safety (ironically caused by the financial catastrophe brought about by U.S. financials) has been the only thing that has saved the dollar. But there's going to come a day - I don't know when, but it's coming, and it's coming hard - when the dam breaks and the dollar gets crushed. The only benefit for me as mainly a U.S.-dollar-earning European resident is that the scenario for the euro arguably looks even worse.

That doesn't mean you should go out there and pile in on the yuan necessarily, though it seems like the no-brainer trade out there (for the tactical folks out there - who seem to be the buyers of many of the tradable index products at the moment, who know what happens with the Chinese government letting the yuan float or not). And also bear in mind that the boom in the Chinese economy has been largely built on those borrowed U.S. dollars - and that China is getting crushed right now as the export market gets crushed.

All that said ... with the fundamentals the way they are and inflation potentially at some point again on the rise, you've got to like commodities and the commodities-dependent emerging markets, Asian currencies - and my old favorite, gold. And I'd be cautious about the U.S. dollar. You never want to be on the wrong side of a dam bursting. Just ask the British.

Regarding the Claymore, iShares, etc., deals - I'm going to cut out the gossip. I do think that's a huge deal though, that if it goes through, as Matt says, is extremely interesting and could end with Claymore rapidly becoming a top-tier ETF player. I've long really liked a lot of the Rydex product suite and also like the people at Team Claymore ... so we're definitely going to keep our eyes open on that, on the BGI/iShares deal and all the rest.

Have a good rest of the weekend.

Comments

[aarc:]

The US owns China now.

There is a saying borrow 1 million from the bank and the bank owns you. Borrow 100 million and you own the bank.

As for the US dollar. The Euro dollar exerts most of the pressure toward the weakness the dollar for more than 7 years that ended in mid-2008. Euro$ went up, US$ went down. Not after mid-2008 where the Euro$ dropped down like a stone. Extremely hard to recover from such a type of drop from a technical point of view. Fundamentals also not supporting a recovery in the price of Euro$/US$ in the medium to long-term.

Euro$ is now in a medium-term downtrend on the monthly chart and in a short-term corrective rally on the weekly chart . With no other currency expected to exert major pressure into the price of dollar vis-a-vis major currencies. The US$ is expected to go up in the next several months if not for several years as the Euro$ goes down.

I expect the US$ will start the next rally leg by late H2 2009 as the Euro$ goes down to an exchange ratio more likely in parity with the US$.

UUP should be able to reach close to if not greater than $30 as the Euro$ goes down to parity level with the US$.

May 18 09:11 AM

[User 305589:]

whenever i hear someone talk of a 'nobrainer' investment i get that strange feeling. most so-called nobrainer trades turn out to be terrible bets and should never have been done if the brain was properly involved in the first place.
That being said, betting on Asia may work well - though i don't think it will work out as nice and as fast as most people and as the author of the article obviously believes. Asia as a whole is extremely export-oriented - with their major customers (Europe, USA, Japan) being in bad-terrible shape right now. Don't get fooled by the so-called inner-Asian trade. It is , to a large extent, reflecting the production chain of goods finally ending up in the USA or Europe or Japan. All that the Chinese can do and are doing at this point is to use their 2 trn $ in currency reserves to either buy commodities, build their infrastructure, artificially boost their economy with forced lending and artificial public sector consumption and manipulate their economic statistics to make their economy appear stronger than it really is. However, they cannot solve any underlying issue by pursuing these things, all they can do is to buy time. If the USA/Europe/Japan are not swinging into a strong recovery mode, then the Chinese will have a huge problem and even their forex reserves cannot save them.
Like it or not (i don't like it, btw), there will not yer be a sustained recovery in Asia or elsewhere as long as the usa is not really recovering. It simply doesn't work given the size of the us economy and the close ties within the global economic village.
Betting on a china upswing is essentially a high beta bet on a strong u.s. recovery. At this point it is NOT a diversification and NOT a hedge against a collapsing us-dollar, counterintuitive as it may seem.

May 18 10:34 AM

[The Aft Deck:]

Beijing reported that investment in factories and property development jumped 30.5 percent during the first four months of the year to 3.71 trillion yuan ($543.2 billion)

There were some other factors in the trade figures, which can fluctuate wildly from month to month.

Recent increases from the previous month in exports of clothing, shoes, plastics and other labor-intensive consumer goods suggest some recovery in demand. And surging imports of iron ore, crude oil and other commodities suggest that China's domestic demand may be stabilizing.

May 18 02:26 PM

[User 305589:]

domestic demand in China these days is essentially state-induced demand. Only time will tell whether they can buy themselves enough time again. It worked duriong the Asian crisis in the late 1990s. Whether it will work this time again is much more uncertain, imho. And of course, ANY figure published by Bejing has to be taken with more than a grain of salt.

On May 18 02:26 PM The Aft Deck wrote:

> Beijing reported that investment in factories and property development
> jumped 30.5 percent during the first four months of the year to 3.71
> trillion yuan ($543.2 billion)
>
> There were some other factors in the trade figures, which can fluctuate
> wildly from month to month.
>
> Recent increases from the previous month in exports of clothing,
> shoes, plastics and other labor-intensive consumer goods suggest
> some recovery in demand. And surging imports of iron ore, crude oil
> and other commodities suggest that China's domestic demand may be
> stabilizing.
>

May 19 04:32 AM