Ed Moya – Senior Market Analysts at OANDA – Tue 3 Sep, 2019

Trade Wars Are Getting Worse But Here Are Some Potential Optimistic Outcomes

Ed Moya, Chief Market Analyst at ONANDA joins me today for a look at the moves in the markets. We are seeing a continuation of fears in the market as US markets are selling off and the dollar and precious metals are moving higher. A lot of the fear revolves around the ongoing trade war between the US and China. For as negative as everyone is Ed shares some thoughts on how it could get better in the near term.

Click here to follow along with what Ed is writing about at OANDA.

Chris Temple from The National Investor – Tue 27 Aug, 2019

G7 takeaways, Trump as the new PPT, and the environment that supports safe assets

Chris Temple, Founder of The National Investor is back to recap some of the news event that have moved markets in the short term. Especially the tweets by Trump to kick off this trading week that provided a nice boost to markets which seem to not have a lot of facts behind them. More importantly there are longer term developments for the US dollar and trade that need to be focused on.

Click here to visit Chris’s site and consider signing up for his newsletter.

Exclusive Comments from Marc Chandler – Fri 16 Aug, 2019

Yields, China Issues, and a look ahead to next week’s news

Marc Chanlder, Managing Partner at Bannockburn Global ForEx shares his thoughts on the bond market in the US and around the world. We also dive into the issues China is facing with trade tensions and the protests in Hong Kong. We then look ahead to next week and the news events that are the most important.

There’s a lot take in in this interview but if you have any follow up questions please email me at Fleck@kereport.com.

Click here to visit Marc free blog – Marc to Market.

China: Paper Tiger

This post China: Paper Tiger appeared first on Daily Reckoning.

China’s shock currency devaluation last week begs the following questions: Is China a rising giant of the twenty-first century poised to overtake the United States in wealth and military prowess? Or is it a house of cards preparing to implode?

Conventional wisdom espouses the former. Yet, hard evidence suggests the latter.

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Your correspondent in the world famous Long Bar on the Bund in Shanghai, China. The Long Bar (about 50-yards long) was originally built in 1911 during the heyday of foreign imperialism in China just before the formation of the Republic of China (1912-1949). Bar regulars were divided into “tai-pans” (bosses who sat near the window), “Shanghailanders” (who sat in the middle), and “griffins” (newcomers who sat at the far end).

I made my first visits to Hong Kong and Taiwan in 1981 and my first visit to Communist China in 1991. I have made many visits to the mainland over the past twenty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips. My visits have included Chongqing, Wuhan, Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.

I spent five days cruising on the Yangtze River before the Three Gorges Dam was finished so I could appreciate the majesty and history of the gorges before the water level was lifted by the dam. I have visited numerous museums and tombs both excavated and unexcavated.

My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people, some of who just wanted to practice their English language skills on a foreign visitor.

In short, my experience with China goes well beyond media outlets and talking heads. In my extensive trips around the world, I have consistently found that first-hand visits and conversations provide insights that no amount of expert analysis can supply.

These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China and a more acute analytical frame for interpretation.

An objective analysis of China must begin with its enormous strengths. China has the largest population in the world, about 1.4 billion people (although soon to be overtaken by India). China has the third largest territory in the world, 3.7 million square miles, that’s just slightly larger than the United States (3.6 million square miles), and only slightly behind Canada (3.8 million square miles).

China also has the fifth largest nuclear arsenal in the world with 280 nuclear warheads, about the same as the UK and France, but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.

China has the second largest economy in the world at $15.5 trillion in GDP, behind the U.S. with $21.4 trillion, and well ahead of number three Japan with $5.4 trillion. China’s foreign exchange reserves (including gold) are the largest in the world at $3.2 trillion (Hong Kong separately has $425 billion in additional reserves).

By way of contrast, the number two reserve holder, Japan, has only $1.3 trillion in reserves. By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia.

Yet, these blockbuster statistics hide as much as they reveal. China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis.

China’s military is growing stronger and more sophisticated, but it still bears no comparison to the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.

Most importantly, at $11,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists. The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to purse assembly-style jobs.

The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.

Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.

China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.

In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.

With this background and a flood of daily reporting on new developments, what do we see for China in the months and years ahead?

Right now, China is confronting social, economic and geopolitical pressures that are testing the legitimacy of the Communist Party leadership and may lead to an economic crisis of the first order in the not distant future.

In contrast to the positives on China listed above, consider the following negative factors:

Trade wars with the U.S. are escalating, not diminishing as I warned from the start in early 2018.

Trump’s recent imposition of 10% tariffs on the remaining $300 billion of Chinese imports not currently tariffed (in addition to existing tariffs on $200 billion of Chinese imports) will slow the Chinese economy even further.

China retaliated with a shock devaluation of the yuan below 7.00 to one dollar, a level that had previously been defended by the People’s Bank of China. Resorting to a currency war weapon to fight a trade war shows just how badly China is losing the trade war.

But, this currency war counterattack will not be successful because it will incite more capital outflows from China. The Chinese lost $1 trillion of hard currency reserves during the last round of capital flight (2014-2016) and will lose more now, despite tighter capital controls. The spike of bitcoin to $11,000 following the China devaluation is a symptom of Chinese people using bitcoin to avoid capital controls and get their money out of China.

The unrest in Hong Kong is another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest has spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.

This social unrest will grow until China is forced to invade Hong Kong with 30,000 Peoples’ Liberation Army troops now massed on the border. This will be the last nail in the coffin of the academic view of China as a good global citizen. That view was always false, but now even the academics are starting to understand what’s really going on.

International business is moving quickly to move supply chains from China to Vietnam and elsewhere in South Asia. Once those supply chains move, they will not come back to China for at least ten years if ever. These are permanent losses for the Chinese economy.

Of course, lurking behind all of this is the coming debt crisis in China. About 25% of China’s reported growth the past ten years has come from wasted infrastructure investment (think “ghost cities”) funded with unpayable debt. China’s economy is a Ponzi scheme like the Madoff Plan and that debt pyramid is set to collapse.

This cascade of negative news is taking its toll on Chinese stocks. This weakness began in late June 2019 when the summit meeting between U.S. President Trump and President Xi of China at the G20 Leaders meeting in Osaka, Japan failed to produce substantive progress on trade disputes.

Since then, the trade wars have gone from bad to worse and China’s economy has suffered accordingly. My expectation is that a trade war resolution in nowhere in sight and the trade war issues have been subsumed into a larger list of issues involving military and national security policy.

The new “Cold War” is here. Get used to it.

Regards,

Jim Rickards
for The Daily Reckoning

The post China: Paper Tiger appeared first on Daily Reckoning.

Why China’s a Paper Tiger

This post Why China’s a Paper Tiger appeared first on Daily Reckoning.

Markets are still digesting last week’s Chinese devaluation that sent the Dow crashing over 700 points last Monday.

And as everyone knows by now, the Trump administration labelled China a currency manipulator.

The ironic part of it is that China has been manipulating its currency to strengthen it against the dollar.

Here’s the dynamic you need to understand…

The Chinese yuan is softly pegged to the dollar. To maintain the soft peg, the People’s Bank of China (PBoC) sells dollars and buys yuan.

That props up the yuan. It’s basic supply and demand economics.

One of the primary reasons China tries to strengthen the yuan is to prevent capital flight out of the country. If the yuan depreciates too rapidly, massive amounts of Chinese money would look to flee abroad where it can get much higher returns.

After all, would you want to hold a rapidly deteriorating asset that constantly loses value? Or if you were a Chinese investor, would you try to convert your money into a currency that holds its value?

That’s the question Chinese investors have been facing.

A capital drain could devastate the Chinese economy, which badly needs the capital to remain in China to support its massive Ponzi schemes, ghost cities and overinvestment.

That’s why the PBoC has been trying to support the yuan, even though a cheaper yuan helps Chinese exports.

That’s the conundrum China faces. It wants a cheap yuan — but not too cheap.

I wouldn’t call last Monday’s devaluation  the sort of “max devaluation” I’ve warned my readers about before. That would have been a devaluation of 5% or more in a single day, and that’s not what happened last week. I would classify it as a “red line” devaluation.

The yuan temporarily broke through the 7.00:1 “red line” dollar peg. It has since returned to normalized levels.

It’s actually ironic that China is being labelled a currency manipulator, if manipulating your currency means cheapening it.

That’s because China was manipulating its currency to strengthen it against the dollar. And when the yuan/dollar exchange rate crossed the 7.00:1 “red line,” that meant China temporarily stopped manipulating its currency higher.

If China didn’t manipulate the yuan higher, it would depreciate even more against the dollar. And the exchange rate stabilized last week when China resumed the manipulation. In other words, when China strengthened the yuan.

Welcome to the currency wars! They take on a logic all their own. In many ways it’s a race to the bottom.

I explained it all years ago in my 2011 book Currency Wars.

As soon as one country devalues, its trading partners devalue in retaliation and nothing is gained. China’s case is complicated by its desires for both a strengthened and weakened yuan.

But the ultimate reality is that currency wars produce no winners, just continual devaluation until they are followed by trade wars. That’s exactly what has happened in the global economy over the past 10 years.

Currency wars and trade wars go hand in hand. Often they lead to actual shooting wars, as I have repeatedly pointed out.

Let’s hope the currency wars and trade wars don’t turn into shooting wars as they have in the past.

But below, I show you why China is more of a paper tiger than an actual one. Why do I say that? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

The post Why China’s a Paper Tiger appeared first on Daily Reckoning.

Chris Temple from The National Investor – Tue 6 Aug, 2019

The disconnect behind labeling China a currency manipulator

Trump is back to attacking China as a currency manipulator so Chris Temple and I breakdown the issues we have with this argument. Whether Trump know what he is doing or not if China goes off the cliff it’s going to bring down a lot of other countries as well.

As for the quality, our connection was very inconsistent. I am on the road all this week and the internet at my current location is not the best. Hopefully you can still all understand what Chris was saying.

Click here to visit Chris’s website and learn more about his newsletter.

Chris Temple from The National Investor – Mon 1 Jul, 2019

Breaking Down the Trump Xi Meeting, North Korea Meeting, and Market Reactions

Chris Temple joins me to weigh in on all the headlines from this weekend. We start with the Trump/Xi meeting and where the discussions stand currently. Next is the unexpected meeting in North Korea. All this news had the markets starting off up for the day but a selloff is continuing and hitting almost everything across the board.

Click here to visit Chris’s site for more market and broad economic commentary.

Chris Temple from The National Investor – Fri 28 Jun, 2019

How to position your portfolio into a news heavy weekend

Chris Temple, Founder of The national Investor shares his thoughts on how to be positioned heading into the weekend where we have a major news event. This weekend it is the G20 meeting between Trump and Xi. We also discuss the importance of the close this week at month and quarter end.

Click here to visit Chris site and find out more about his newsletter.