- “Let’s devalue again today!”
- “No, no, not that much!”
- How Janet Yellen tied China’s fate to America’s… and what’s next
- How World War III might begin: An update
- Controlled market chaos … the Pentagon “loses” a couple of Humvees… a solar skeptic speaks up… and more!
Whoops — did China already go too far with this devaluation thing?
From The Wall Street Journal website: “China intervened to prop up the yuan Wednesday, according to people familiar with the matter, just a day after it had let it decline sharply, underscoring the tricky balancing act now facing its central bank: how to keep the country’s currency from free-falling.”
Let’s backtrack a bit: Yesterday, as noted in The 5, the People’s Bank of China devalued the renminbi against the U.S. dollar by 2%. Today, the PBOC yanked it down another 1.6%. But then market forces took over and dragged it down still more in the currency markets.
And so with 15 minutes left in the Chinese trading day, the PBOC ordered state-owned banks to dump dollars to arrest the bleeding — if the Journal’s anonymous sources are to be believed, we hasten to add. The yuan jumped 1%.
It’s as vivid a reminder as any: The miracle of China’s ascendance these last 35 years does not alter the fact that central planners run the joint… and they’re as vulnerable to the law of unintended consequences as central planners anywhere else on the globe.
So now what? The situation “could settle down,” writes EverBank’s Chuck Butler in today’s Daily Pfennig, “or it could be like a snowball rolling downhill, and become a bigger problem for the rest of the globe.”
And it might not even achieve the aims of Chinese leaders — propping up exports. “While the Chinese have attempted to diversify their economy,” Chuck says, “they still depend heavily on exports to fuel their economy, and exports dropped 8.3% last month… What does that tell you about the strength of the major economies around the world?
“I think that China is going to find out that devaluing their currency to make exports less expensive isn’t going to be the medicine to cure all that ails them… Look around the world… Everyone is doing it (debasing their currencies to promote exports), and no one is having a good time.”
“Understanding how U.S. and Chinese monetary policies are now joined at the hip, and what this means for the entire world, is the key to understanding the global slowdown affecting stocks, currencies, commodities and even the real value of cash,” says Jim Rickards.
Here in the United States, Fed chair Janet Yellen has committed to increasing the fed funds rate — sometime, pinky swear. But it’s all “data dependent,” as the saying goes. And none of the “Big Three” data points — unemployment, inflation or GDP — is meeting her stated criteria for a rate increase.
“Yellen has painted herself into a corner with no escape,” says Jim. “She’s talking tough on raising rates at a time when the U.S. economy is slowing. The tough talk makes the dollar stronger, which is deflationary. This pushes Yellen further away from her inflation goals.”
Meanwhile, China has maintained a loose peg to the dollar. That’s a condition of China’s eventual inclusion in the SDR — the “super currency” maintained by the International Monetary Fund.
“The problem with that is when you peg your currency to another country, you outsource your monetary policy to that other country’s central bank. If the Fed tightens (or even talks about it), China has to tighten to maintain the peg.”
Result: “Yellen has caused the U.S. and China to tighten policy at a time when both should be easing,” Jim says.
Sure, China devalued yesterday and today… “but the damage to its growth has already been done.
“Yellen may not understand what she is doing, but markets do. The deflationary dynamic caused by the Fed is showing up in the 1,000-point decline in the Dow Jones index in the past three months, 60% declines in many commodity prices and record plunges in emerging-market currencies from Brazil to Turkey and Malaysia.”
That’s “collateral damage” from the currency wars for you.
[Ed. note: In addition to Jim’s notes for today’s 5, he’s recorded a brief and urgent video — exclusively for Agora Financial readers — in light of this new phase in the currency wars.
The video quality is less than optimal… but events are moving quickly. We’d rather bring you timely information than make everything perfect. Check out Jim’s message right now at this link.]
The uncertainty from China is rattling U.S. stock traders for a second day… but “panic” is too strong a word.
At the open, the major U.S. indexes tumbled about 1.5%. But as we write, they’ve recovered about half of those losses. The S&P 500 sits at 2,068.
At last check, the major U.S. indexes are down roughly 1.5%. Yesterday, the Dow took it worst; today, it’s the Nasdaq. The Dow is now down 6.25% from its May 19 record close. The Nasdaq is back below 5,000 — off 5% from its record close on July 20.
Hot money is seeking safety in Treasuries, sending prices up and yields down. The 10-year yield sits at 2.09% — equaling a low set just after Memorial Day.
Gold is likewise benefiting, the bid up to $1,120. It helps that the dollar is tumbling relative to the other major currencies — the dollar index is down 1% as we write, to 92.2.
“Russia and NATO are actively preparing for war with one another amid the greatest buildup of military tension in Europe since the end of the Cold War,” says the U.K. Telegraph, citing a report from a think tank called the European Leadership Network.
Can’t say we didn’t warn you. And as if there weren’t enough to fret about this morning…
The report doesn’t say war is inevitable… but it does point out the dangers from NATO and Russia performing military exercises in close proximity in Eastern Europe.
You aren’t hearing about it from establishment media, but the report comes at a delicate time: The fighting in Ukraine has become the most intense in six months. Last February, the “Minsk II” accords brought a shaky cease-fire into effect between Russian-backed rebels in eastern Ukraine and the U.S.-backed Ukrainian government that came to power in a coup 18 months ago.
If the cease-fire can’t hold, expect to hear renewed talk of Washington arming up the Ukrainian government.
And if that comes to pass? “If you supply weapons, then you have to send instructors,” says Lt. Gen. Evgeny Buzhinsky. He was one of Russia’s most senior international military negotiators until his retirement in 2009.
In an interview with the BBC, Buzhinsky says, “It is a fairy tale that [the instructors] can be somewhere in western Ukraine training Ukrainians, who then take the weapons and go east” — where the fighting is going on.
“Instructors should be on the front line. And if so, there should be casualties, losses, hostages and prisoners. And that would mean direct involvement of the U.S. in the conflict.”
What’s more, if the Ukrainian government crosses the cease-fire line to try to take back the east, Buzhinsky implies Russia will launch a full-scale invasion: “If Kiev starts a major offensive on the pretext that they are being shelled… then Russia might interfere, and that of course will be war.”
Meanwhile, we’re still waiting for someone in Washington to explain what American interest is at stake in Ukraine to justify risking an outbreak of World War III…
How does the federal government manage to “lose” two Humvees?
We’ve come to that point in today’s 5 where, most of the time, we poke fun at the foibles of someone in the business world or point up a bureaucratic outrage for laughs. But even our “quirk” slot today contains a downer.
The city of Ferguson, Missouri — yes, that Ferguson — has been ordered by the Pentagon to return two Humvees under the “1033” program that distributes surplus military gear to local police departments. Evidently, the city was supposed to get two, but took delivery on four, says The Guardian — which broke the story yesterday.
So what happened? “The Ferguson police department officially has two Humvees on their books; the state coordinators provided the police department two more Humvees without following the proper transfer protocol,” says Pentagon spokesman Mark Wright.
BS say the state coordinators — the people who act as go-betweens for the Pentagon and local police forces. They say the Pentagon did authorize four Humvees for Ferguson before “losing the records” for two of them. The Guardian is still waiting for a response from the Pentagon to that.
This new era of Pentagon profligacy — with a police militarization component — sort of makes us pine for the innocent days of $435 hammers and $600 toilet seats…
“Solar still has a long way to go before it is mainstream viable,” a reader grouses after our quirky item last week about a solar-powered 1966 VW bus.
“$30,000 to go 35 miles via solar versus $8 in gas. Solar here is an economically stupid choice.
“Solar has SOME limited economic application, but transportation is NOT one of them.
“Even with government transfer payments (receiving stolen property), grid parity is only viable:
1. In the top 10 most expensive states
2. For daytime fixed-location nonstored generation and immediate-use applications
3. With FREE owner/user supplied installation.”
The 5: No doubt you’re right about the transportation part. All we were pointing out is that the panels have become efficient enough that a guy in Boston can even think about throwing a solar panel atop a VW bus in the first place. (Heck, the range goes down to 20 miles if there’s no sun.)
Now… if you’re pooh-poohing solar as an investment theme, that train’s left the station. All three members of our energy team refused to get on the solar bandwagon when solar stocks were riding high in 2007-08. And a good thing that was — most of those stocks collapsed far worse than the broad market did during the Panic of 2008.
But the costs have reached a point now that the solar industry has real companies with real customers making real money.
“Every modern energy source on Earth has followed the same path,” says our Matt Insley.
“After the discovery of coal, oil or natural gas, TRILLIONS of dollars of investment followed.”
And it’s not too late to hop on board — as Matt explains here.
“To the reader complaining about his costs covering those who didn’t prepare for their retirement and medical expenses — what gives?” reads another email in our inbox.
“Not patriotic enough to pay for those who had to have the big ride or all of the toys when they were younger? Maybe recreational pharmaceuticals too? Go ahead and let them spend part of your retirement money too. Come on, be a sport.”
“Can’t help but wonder,” a reader writes after we noted that regulations consume 11% of Vanderbilt University’s budget, “if the ivory towers are getting 11% in cash and benefits from the feds back or if they might figure on ‘going Hillsdale’ and cutting the compliance costs.”
The 5: The reader is referring to Hillsdale College in Michigan, which famously rejects any sort of federal aid.
What difference does it make, really? As long as EZ credit subsidizes the metastasizing student loan market, you can keep jacking up tuition regardless of whether the federal grants offset the costs of regulation.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. It’s hard to get away from China headlines: “China Weakens Its Currency Further, Jolting Global Markets,” says The New York Times.
“I’ve been literally running between live TV interviews all day to discuss what’s next in this China currency war scenario,” says our Jim Rickards.
But there’s something he hasn’t said about these wars on TV. Jim’s reserving that message for Agora Financial readers — people like you who’ve proven they take events like these seriously. We urge you to give this two-minute message your attention.
