- The currency wars reignite: China takes its turn
- How China just cornered the Fed (even worse than it was before)
- Market fallout: Stocks slipping, oil sliding, copper crushed
- 5 Min. travel alert: The truth about the no-fly list
- Small-business owners sanguine… the cost of federal regulations, campus edition… more health care cost craziness… and more!
“What if China decides to do what everyone else in the world has done to their currencies, debasing them, depreciating them, and whacking them until there is no more to whack, just to improve their exports?” mused our friend Chuck Butler yesterday.
From Chuck’s lips to the Politburo’s ears: The People’s Bank of China devalued the renminbi overnight.
“This is the biggest one-day move since July 2005,” Chuck writes the morning from his perch at EverBank Global Markets in St. Louis, “when the Chinese dropped the peg to the dollar and revalued the currency upward by 2%.”
The essential background: Chinese exports have been plunging of late. That’s because most of China’s biggest trading partners have seen their currencies fall against the renminbi the last 18 months, so imports from China cost more. The United States is the notable exception, because a loose peg remains between the renminbi and the dollar.
So if the Chinese are to keep pace with everyone else — all the cool kids are doing it! — they must devalue against the dollar and fire the next shot in the currency wars…
And on it goes: “Now China’s trading partners will have to make moves in their currencies so that the offset currencies aren’t too strong and out of whack when compared to the renminbi,” Chuck adds.
“King Dollar is the only strong currency left. That should kill the Fed September rate hike,” tweeted Jim Rickards only moments after the announcement from Beijing.
“A cheaper yuan means a strong dollar, which lowers import prices, which is deflationary for the U.S.,” he adds. “You raise rates to fight inflation and cut them to fight deflation.”
What do you do if the fed funds rate is near zero and has been for lo the last 6½ years? You don’t raise them, that’s for sure.
This morning, the mainstream is throwing in the towel, going along with Jim’s long-standing assertion the Fed won’t raise rates at its next meeting Sept. 16-17. “I doubt if [the Chinese decision] will derail the Fed’s plans to tighten, but it may well slow the pace of their tightening,” IronFX’s Marshall Gittler tells MarketWatch.
Jim also sees a tit-for-tat element at work in China’s decision: Recall last week the International Monetary Fund decided the renminbi still wasn’t ready for prime time. It chose to delay the Chinese currency’s inclusion in the IMF’s “super currency” called the special drawing right (SDR). “Wait till next year” was the IMF’s message.
“Pushing the SDR decision back nine months was playing rough with China,” Jim suggests, “ so they decided to play rough with us.”
All’s fair in the currency wars he’s been chronicling since he wrote the book of that name in 2011.
Thus is the Dow leading the major U.S. stock indexes down this morning. Dominated by exporting names like Caterpillar, the big index is off nearly 1% as we write — 17,466. The Nasdaq and the small-cap Russell 2000 are off about a half percent.
Poor Google: The Chinese devaluation sucked all the air out of its big announcement after the close yesterday. The firm is restructuring. Its newer ventures like the “smart home” unit Nest will be put under the umbrella of a new division called Alphabet. More established ventures including the search engine and YouTube will remain under the Google moniker. The parent company will now be called Alphabet Inc.
Elsewhere, Treasury yields are falling, the 10-year note now at 2.15% — its lowest since June 1. Gold is holding its own above the $1,100 level, the bid $1,107 at last check.
The dollar is little moved relative to other major currencies like the euro and yen; the dollar index sits at 97.2. The currencies in the countries most dependent on China for trade have taken a hit today, like the Australian dollar and Singapore dollar.
But if it’s real carnage you’re looking for, it’s in the nonprecious metal commodities.
China’s devaluation is as clear a signal as you can get that the mighty Chinese economy is sputtering.
Thus base metals are uniformly ugly — aluminum down more than 2.5%, nickel down nearly 4%. Copper is down more than 3%, to $2.32 — a six-year low.
And crude is down nearly 4% as we write, to $43.17 — less than 75 cents from the lows in March.
Adding to the downward pressure: OPEC revealed overnight that its member nations are now pumping oil at the highest rate in three years.
The spirits of small-business owners are lifting as summer rolls on: The Optimism Index from the National Federation of Independent Business recovered a bit in July from an ugly June — up 1.3 points, to 95.4.
That’s still well below the long-term average going back to the mid-1970s. But here’s a silver lining of sorts: One in four small businesses says it has job openings that are hard to fill.
Taxes and regulations are back in a virtual tie when owners are asked their single-most important problem — 22% identify taxes, 21% say it’s red tape. “Quality of labor” comes in third place. Hmmm…
Now we know: Homeland Security engages in the sort of “pre-crime” shenanigans we thought were limited to Philip K. Dick’s novels.
From The Guardian: “In a little-noticed filing before an Oregon federal judge, the U.S. Justice Department and the FBI conceded that stopping U.S. and other citizens from travelling on airplanes is a matter of ‘predictive assessments about potential threats,’ the government asserted in May.”
In other words, you can be put on the no-fly list not for something you’ve done… but rather something you might do.
The disclosure is the latest twist in long-standing litigation filed by the ACLU. Back in March, the feds began informing people they were actually on the list and giving them the option to pursue a “redress inquiry.” Progress?
Maybe not: The Justice Department is seeking to block the release of any more information about how its “predictive assessments” are made. National security, dontcha know.
Or would it simply be embarrassing? Remember the TSA has blown $900 million since 2007 checking out airline passengers against this list of suspicious behaviors — noted in a previous 5 Min. travel alert last March…
More of your government in action: Here’s a little-discussed factor behind the spiraling cost of a college education.
Vanderbilt University commissioned a study by the Boston Consulting Group last fall. The aim — find out how much the university spends complying with federal regulations. It wasn’t easy — most of the line items were buried within the budgets of individual academic departments.
The total works out to $146 million a year — 11% of the university’s budget. Of that $146 million total, 80% is spent on “research-related compliance costs.”
Huh?
From the university’s own summary: “regulatory areas specific to research, including federal grants and contracts management, research/human participation compliance, environmental health and safety compliance related to research, animal research compliance, export controls compliance, conflict of interest, technology transfer requirements and research misconduct requirements.”
Grants and contracts management? Yeah, it costs money to be on the federal teat!
Well, it’s an interesting wrinkle to the skyrocketing-tuition story regardless. The core problem remains easy credit for student loans giving universities incentives to charge extortionate amounts. Gotta keep all those assistant provosts living in style…
“Interesting timing,” a reader writes, circling back to our recent discussion of Byzantine health care pricing. “I’d just come back from picking up my prescription for Armour Thyroid, a natural medication I’ve been on for many years.
“About a year ago, it cost $15, as it had for years. Then it went up to $21. Then $25. That’s what it cost last month. Today, it was $36. Needless to say, as a retiree on fixed income, I am furious. This isn’t something that took years of R&D and FDA vetting to release. So going up 40% in a month? Outrageous.
“This is apparently a controversial medication since it’s not really a ‘drug.’ Years ago when I was still working and had insurance that covered prescriptions, the copay was higher than what it cost if I just paid cash and skipped the insurance. In some cases, it wasn’t even the lowest copay! WTF?? The fact it is natural drives them crazy, but it’s the only one that works properly for so many of us. They’re stuck. Big surprise: Synthetics just don’t do it.
“Since this is the only medication I’m on, I didn’t opt in for the Medicare prescription coverage. I get the feeling since they can charge each person whatever they want that maybe folks like me who don’t have that coverage are charged more, to try to coerce us into taking it to subsidize those whose meds that cost $1,000 or more per month.
“I’ve worked all my life and paid plenty of taxes as well as my share into Social Security. I’ve lived within my means and saved a reasonable but not outrageously huge nest egg for my retirement. I’ve always taken care of myself and will continue to do so, but I resent having to pay for those who didn’t work or were too foolish to plan for their old age.”
The 5: Two years ago, your editor was sleeping poorly enough to have a one-night sleep study performed at a nearby hospital.
At the time, I had a deductible of $2,500. To this day, I’m certain the hospital looked at what my deductible was before deciding what to charge me — a figure slightly less than $2,500.
What was the actual cost of services rendered and facilities used? Who knows? But I’m reasonably sure I was subsidizing the sleep studies of the four other people who showed up that night…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As we write, the Dow has shed another quarter percent. Now it’s below 17,400. “U.S. stocks losses intensified Tuesday as the Dow fell more than 200 points after a surprise devaluation of the yuan by China,” says a new dispatch from MarketWatch.
We’ve been saying it all year: As nations engage in currency wars, the knock-on effects can spread far and wide. Some investors get caught with their pants down. But others can pull down big gains… because they can anticipate nations’ maneuvers in advance.
That’s the idea behind Jim Rickards’ IMPACT system. We’ll be reopening access to Jim’s Currency Wars Alert service tomorrow. Watch this space for updates.
P.P.S. As long as we brought up the subject of sleep earlier…
Scientists have discovered your “brain activity” changes before you fall into a deep, restful sleep. Here are representations of what the change looks like:
If you’ve ever lain awake at night… mind racing… unable to fall asleep even though you feel exhausted…
… it might simply be because you’re failing to switch your “brain activity.”
Click here for the solution.
