China's Arithmetic When It Comes to the Dollar 19 comments
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“It will be helpful if Geithner can show us some arithmetic”
-Yu Yongding
From the lens of a global risk manager, this morning has to be one of the more fascinating that I have ever woken up to. At the same time as the US Government is setting themselves up to announce one of the largest bankruptcies in US corporate history, we have a squirrel hunting US Treasury Secretary telling the Chinese to “trust us” and America’s currency. That a boy!
Providing leadership to the world’s increasingly interconnected economy is by no means an easy task, and maybe that’s why the world is voting against America holding the world’s reserve Currency Conch any longer. Timmy Geithner’s effectiveness with the Chinese translators overseas this morning is borderline laughable.
There was a time when the Wizards of Wall Street’s Oz could fly overseas and make a comment like “we are committed to a strong dollar” and it would actually matter. Rather than getting on a plane and shaking hands with The Client (China) himself, President Obama opted to send the same guy that called the holder of $768B in US Debt “manipulators"... Nice!
When it comes to financial market sophistication, other countries aren’t as gullible as they used to be. An internet connection and You Tube screen have effectively changed all that. On the heels of Timmy’s “reassuring” comments, the US Dollar is getting spanked again, trading down another -0.73% to lower-lows at $78.63. Rather than fading Geithner from my soapbox, now the world is – it’s sad.
I understand that this is all doesn’t matter yet because someone on CNBC is hopped-up about where the US futures ramped into Friday’s close and look here on today’s open. That manic behavior really helps America’s reputation. At the end of the day, the US stock market could go up another 6% to 9% today, and it would still be amongst one of the worst performing stock markets in the world.
The Dollar moving into crisis mode matters. First, all of the reflation trades pay themselves out in full. Second, all of the global political capital associated with the almighty Petro-Dollar gets redistributed. And Third, well… rather than analyzing this as the said Great Depression Part Deux… how about another Third Quarter of 2008 in US Equities?
Nah, that’s crazy right? Like they say in the Canadian Junior Hockey Leagues, “crazy is as crazy does”! There are loads of unintended consequences associated with a US Dollar crashing – the only other sustainable break we’ve seen in the US Dollar Index below the $80 level since 1971 (when Nixon abandoned the gold standard), was that one that led us to that 2008 Third Quarter…
After locking in another +5.3% month for May, the S&P500 is up a whopping +1.8% for the YTD. Unlike most global equity markets that are charging to higher-highs this morning, the S&P500 is still trading below its January 6th high of 934.
On the heels of another strong, albeit not herculean PMI manufacturing report last night (it decelerated slightly month over month), China’s stock market charged to higher-highs, closing up another +3.4%. The Shanghai Composite Index is now +49.5% YTD, and we, as our British philosophy competitor likes to say remain “long of it.”
From Hong Kong to Russia, stock markets are up +4 to +6% this morning. Why? Because, much like the only other time we saw the US Dollar break down to these levels, everything that China needs reflates. Oil prices and the promises of a potentially empowering Chinese handshake have the Russian Trading System Index (RTSI) up +83% for 2009 to-date. Now that and the price of oil trading up +19% in less than 2-weeks is getting someone paid - and it isn’t the American Consumer!
As she trashes her currency, America will continue to lose political capital both domestically and abroad. After all, a -12% three-month swan dive in the US Dollar has hacked over $90 Billion of value from the Chinese position in US Treasuries. Creditors and citizenry hush yourselves! All the while, 17 out of 23 Chinese economists polled are calling holding those Treasuries a “great risk” this morning.
I know, I know… an economist or a billion US Dollars ain't what it used to be…
At some point, China’s interpretation of the arithmetic is going to really matter.
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This article has 19 comments:
The real kicker is the state of the Chinese political arena. Experts suggest that Chinese GDP needs to grow at an unsustainable 5-10% per year to keep unrest at a minimum, and a recession would be catastrophic. So, even if the smart thing to do is to divest of USD now for long term stability, there is a risk that too much of such medicine would put the Chinese economy into recession if the US is hurt too much. Now they are forced to throw good money after bad to prevent the collapse of the dollar and thus their own assets and political system.
There are Trillions of dollars of reserves in the $US dollar, and each of those represents things that America has imported that they have not had to work for.
But China would actually be far better off to be able to place money it prints with other nations than worry about the money that it has squandered in US treasuries. Having international clout on it own currency printing is worth far more than it will lose on Treasuries. Indeed a fire sale of US Treasuries is exactly what it will take to trigger a collapse of the dollar and give China the economic upper hand. Just think of the as a gift from the Greeks. Anyway remember the Helen of Troy saga?
The dollar crisis is at Defcon W (for "worthless").
Hurricane season is here and the first one is called "Your dollar is worth (insert spitting sound)".
Knock-knock
Who's there?
Your dollar is collapsed.
I could go on (and on).
The fun thing for Americans is how billions are moving every day out of the US market. Hey, default on trillions and the world tends to pass you by.
If only America had national health coverage (snicker)...
Maybe the solution will be to proclaim the new "Sino-American Pacific Empire" and China and the US will live happily ever after.
:)
On Jun 01 06:32 PM Cleveland1 wrote:
> The Chinese-American relationship is effectively akin to our nuclear
> policy of mutually assured destruction. They have to keep buying
> dollars in order for Americans to afford the products spewing out
> of their factories while we continue float ungodly amounts of debt
> to prop up our broken economy and assuring our slow growth for the
> next two decades punctuated by inflation once we do start growing.
It would be a severe mistake to underestimate the SCO. If its level of strategic coordination deepens, the SCO’s combined power would turn to be outright frightening for NATO. SCO member States (not including observers):
Control a vast portion of the Eurasian landmass.
Contain huge population centers.
Command large armies equipped with state-of-the-art weaponry (ICBMs, fighter jets, satellites, strategic bombers and fleets of tanks).
Possess massive reserves of natural resources (oil, gas, uranium, metals and fresh water).
Own important industrial plants.
Have accumulated some of the largest amounts of foreign currency reserves.
Can convince other countries to join their organization as full members like India, Pakistan, Mongolia, Iran, Turkmenistan, Belarus, a post-Yuschchenko Ukraine, Armenia, Syria, etc.
So as this sounds familar it should.
The ‘Middle Kingdom’ was already a mighty empire thousands of years before the US was even founded. Thus, China (both as a State and as a civilization) has flourished for centuries and has outlived the Roman, Persian, Arabian, Turkish, Mongol, and British empires, which is by no means an easy accomplishment.
This is why America is nervous.
one thing I've been annoyed at during the plummet is that so many people seem to only perceive the US market. as though Russia and Brazil and China didn't crash. as though nobody else was on the planet at all. if its not in an ADR it doesn't exist.
the US needs to be less myopic, needs to start acting globally going forward.
-Yu Yongding
That is what is known as an understatement.
This is bad for the world. Foreign governments other than the US have nothing to do with the US China imbalance in which they both have been misbehaving quite badly (one a teenager shopaholic the other a greedy baby that throws tantrums). Why should they help subsidize china debt? And when will China learn, they can hoard all the copper and steel they want. There is trillions of tons more where that came from. In the end, if they don't use it, it is a worse repository of wealth than the US dollar or any currency. For one thing, it costs money to store, erodes, doesn't pay interest, and anyone can mine and make it who wants to.
Forget the arithmetic and consider logic. China's problems are all self made command economy decisions. All exports, no domestic demand, no open currency, and no fair trade. No one should cry for them.
On Jun 01 10:19 PM the Moon Will Kill wrote:
>> All exports, no domestic demand<<<
As further evidence of this, China just announced that they will be dismantling the Birds' Nest and will conduct an auction to sell it to the highest bidder globally, which will be followed by the sale of the Tibet-Qinghai railroad. The next stage is to deconstruct their infrastructure for immediate export, shifting the displaced population into tents in the Gobi.
The Man in the Moon knows.
That's a big 'if': they need it for their stimulus/infrastructure projects, & can probably sell it on to SOEs if they've bought an excess. Plus metals are probably cheaper now than it will be when the world economy picks up - even after storage costs & a bit of oxidation...