The Mandate of Heaven and the Currency Wars

  • Why China devalued… and why now
  • What’s Yellen’s strategy in the currency wars?
  • The most important date all year — and how to prepare now
  • Biotech sell-off: Ray Blanco assesses where the sector goes from here
  • The “fearsome threesome” of the financial crisis, together again!
  • Reader explains why solar power doesn’t pay… but he has it at home

“The most important date of the year will be the Sept. 17 Fed meeting,” said Jim Rickards yesterday before jetting off to Hong Kong.
The collective market freakout over China’s devaluation this week is calming down. That’s even though China has pushed the renminbi down against the U.S. dollar for a third straight day. Today’s move was 1.1%. That’s 4.6% total if you’re keeping score at home.
So today, with Jim’s able help, we’re able to step back from what’s urgent… and take stock of what’s important.
“‘Devaluation’ has to be put into a slightly more technical context,” Jim begins.
“Most major currencies float on foreign exchange markets, and the cross-rate between any pair is set by the market.
“The Chinese yuan does not ‘float’ in the same way. The rate is kept within a band by the People’s Bank of China (PBOC)… If the yuan went to the lower end of the band on one day, the following day would start again in the middle of the same band. PBOC would just intervene and do whatever was needed to make this happen.”
Until Tuesday, that was. “From now on, if the yuan traded at the bottom of the band, the next day’s trading would start at that level (instead of the middle of the old band) and could trade down to the bottom of this new band.
“This process will continue indefinitely, so expect more devaluation.
“Technicalities aside, what it means is a shock to the dollar, which is now stronger.”
China made the move now because its economy is “imploding” — that’s Jim’s word.
“In July, exports and imports both collapsed. In June, their shadow banking system (a big part of China’s credit market) completely dried up. There was zero net new lending.
“This kind of slowdown is not just an economic problem in China, it’s a political one. If the Communist Party cannot create jobs, civil unrest and riots are sure to follow. The Communist Party has put survival ahead of good relations with the U.S.”
Ah, yes… That brings to mind one of the more memorable passages from Jim’s first book, Currency Wars: “The study of Chinese history is the study of periodic collapse. In particular the 140-year period from 1839-1979 was one of almost constant turmoil” — bookended by the Opium Wars and the Cultural Revolution.
Chinese leaders are obsessed with keeping order. It’s why they’ve been less than forthcoming about yesterday’s big news there — bigger than the yuan devaluation.
Description: BBC Breaking News Tweet.png
“The disclosure that dangerous chemicals were stored less than a mile from dense residential areas raised questions about the government’s role in monitoring operations at the site,” reports The New York Times. “Middle-class Chinese, increasingly aware of the perils of chemical plants and storage depots in urban areas, have in recent years staged huge street protests demanding that such facilities be relocated to less populated areas.”
In one sense, the Chinese Communists are no different from the emperors of old — they rely on public perception they have the “mandate of heaven” to rule.
So the Chinese economy must be propped up at all costs. No jobs, no mandate of heaven.
So why did China devalue now? The answer is, “Why not?” after the International Monetary Fund decided last week to postpone the yuan’s inclusion in the special drawing right — the IMF’s super-currency for its member governments.
A decision won’t come now till September of next year. “China knew that if they kept the peg until then, their economy would be even more underwater,” Jim explains. “The Chinese stock market was already crashing and the cost of a strong currency was too much to bear. So China took advantage of the breathing room they got from the IMF and devalued just one week after the IMF announcement.
“China can go back to good behavior next year. For now, they’re going for bad behavior (good for them, bad for us) in the currency wars.”
“Janet Yellen and the Fed are the biggest losers in all of this,” Jim goes on, circling back to a point he made here yesterday and the day before.
Recall that inflation as it’s officially measured is nowhere near the Fed’s 2% target.
“The Chinese devaluation just makes the dollar stronger, which is deflationary (because our imports cost less). Raising interest rates makes the dollar even stronger, adding insult to injury on the deflation front. That’s why Yellen can’t raise rates.”
But just because she can’t doesn’t mean she won’t.
As you likely know (because we keep reminding you — heh), Jim has said since last November the Fed would not raise rates anytime during 2015. That is still his position.
But Jim would also be quick to tell you he deals with probabilities in a world with few lead-pipe cinch certainties.
Which brings us back to Sept. 17 being the “most important date of the year.”
“If Yellen does not raise rates in September,” says Jim, “stocks may catch a bid and go up, but it will be a temporary reprieve because the currency wars will continue as they have since 2010.
“If Yellen does raise rates, fasten your seat belt and look out below. Markets will have no bottom and we’ll be in for a 1998-style crash beginning in emerging markets.”
What to do? Start raising cash, says Jim — and bring your gold allocation up to 10% of your portfolio if you haven’t already.
“Once you’ve done that, there are big, fast gains to be made by early investors,” he goes on. “I believe China’s actions are about to make things very interesting.”
It’s times like these — with currency wars fueling market volatility — that create opportunities to double or triple your money within weeks using Jim’s proprietary IMPACT system. In case you missed the new video Jim recorded — highlighting both the perils and the opportunities made possible by China — you can check it out right now. It’ll take only two minutes of your time.

Click here for a time-sensitive message from Jim Rickards

The major U.S. stock indexes are up modestly this morning. The Dow sits at 17,432 as we write — tacking on 30 points after tumbling 250 yesterday morning and making up all of it by the close.
Treasury yields are backing up, the 10-year approaching 2.17%. Gold is in retreat at $1,116.
The big economic number of the day is retail sales. Or more accurately, the revisions to retail sales. The June reading, originally minus 0.3%, is now flat. July came in slightly better than expected with a 0.6% increase, helped by a resurgence of car sales.

The big loser today is crude. A barrel of West Texas Intermediate is down 2.5%, to $42.20 at last check.
If that holds by today’s close, it’ll be a new post-Panic of 2008 low.
“Biotech stocks appear to be going through a correction,” says FDA Trader editor Ray Blanco.
For starters, the Nasdaq Biotechnology Index (NBI) broke through its 50-day moving average last week. “What’s also evident right now,” Ray tells us, “is that small biotechs are getting hit much harder than the big ones.
“The NBI, which is heavily weighted toward big biotechs like the so-called ‘Four Horsemen’– Amgen, Gilead, Celgene and Biogen — is down some 7% from July highs. However, the S&P Biotechnology index (SPSIBI) has dropped by nearly double that amount.”
Ray is holding off on new recommendations for the moment, “but the biotech world isn’t ending,” he reminds us. “There are diseases to treat and lives to be saved. Biotechnology companies hold the keys to health and life, and we get to profit by participating in their work to bring new therapies to market. Clinical trials for life-threatening diseases are ongoing, and the FDA hasn’t stopped scheduling reviews and decisions for hopeful new market entrants.
“For those small biotechs that succeed, the share price gains can be staggering.” And Ray has his eye on a few prime candidates.
Not an Onion headline: “Bernanke, Paulson and Geithner Join Yale Effort to Update Crisis-Response Playbook: Former Treasury Secretary Geithner Calls Gathering ‘a Master Class in Financial Crises for the Firefighter.’”
Or would that be the arsonist?
The three most fear-inspiring figures from the Panic of 2008 — Ben Bernanke as Fed chair, Hank Paulson as Treasury Secretary and Tim Geithner as New York Fed chief and then Treasury Secretary — shared a stage last week in New Haven.
“Their audience: A global group of government officials who might have to respond to the next [crisis],” says The Wall Street Journal, evidently with a straight face.
We are so screwed.
Yale is calling its effort “New Bagehot.” Old Bagehot was Walter Bagehot — pronounced BADGE-it — the British writer and businessman whose 1873 book Lombard Street is looked upon as a playbook for central bankers during a crisis.
We daresay Bagehot is rolling over in his grave so fast he might break the speed of sound.
The “Bagehot rule,” as it’s come to be known, says that in times of crisis, central banks should lend freely…

  • to solvent institutions
  • against good collateral
  • at penalty rates of interest.

As we mused a couple of years ago, the Fed and Treasury didn’t just break the Bagehot rule; they ran it through a buzz saw, doused the remnants with kerosene and set them alight.
At least the Journal article offered up one skeptical voice: “The presumption that ‘what they did stunk, but it saved us’ is just the wrong lesson,” says L. Randall Wray, a bailout critic and evangelist for Modern Monetary Theory.
We’ll say it again. We are so screwed.
“Energy conversion as a percentage of solar cells is improving very slowly,” writes a reader who wishes to weigh in on solar power. “They are not following Moore’s law. Affordable solar cells used in residential applications are in the 15-16% efficiency range. They improve small fractions of a percent annually.
“The cost of solar panels has come down some, but that has largely been a function of gov’t support. China subsidizes solar panel production, as do some other governments. In a free market, the cost of solar panels would be higher. Still, solar panels are not cheap per watt.
“Installation is manual labor and parts. That cost of that has not come down.
“So why do I own the solar panels on my house? Two reasons. First, because I get 30% of the cost of the panels and installation off on my taxes. Second, the state of California requires power companies to buy the electricity my house produces at very favorable rates.
“With those two factors, I have computed that the payback period is about eight years, assuming 3% annual electricity rate increases.
“So basically, the production of the solar cells I bought is subsidized, the installation is subsidized and the electricity production buyback is subsidized. My neighbors are paying for my electricity. Without those three subsidies, the cost for solar energy does not close.
“I really hate that the solar energy industry is only viable with extreme gov’t support. I can be a chump and buy all my electricity from the power company or I can take advantage of the gov’t subsidies.
“In 2017, the 30% subsidy goes away. In California in 2018, the favorable rates that power companies are forced to pay for my electricity go away. When those two subsidies go away, I believe you will see the interest in residential solar drop considerably.”
The 5: We hear ya.
To clarify, the 30% federal tax break goes down to 10% at the end of next year. Congress might well extend it, though. It’s a situation we have our eye on even as we spy the potential for near-term solar profits starting less than two months from now.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “I am never going to invest again in currency,” writes a reader — respectfully turning down our invitation yesterday to join Jim Rickards’ Currency Wars Alert.
Ah, but you don’t invest in currencies using Jim’s proprietary IMPACT system. Forex trading is for pros and for people willing to stay glued to a screen all day. “This is a brand-new way to make money,” says Jim.
“With China’s recent move, there’s never been a more important time to start using my IMPACT system. In just the hours after China’s decision to de-peg its currency from the dollar, global stock markets, commodities and currencies have started gyrating wildly.”
That’s when Jim’s system works best. If you don’t want to miss out on IMPACT buys in the coming weeks, check out this short message from Jim.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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