- What the Chinese president said… and what he meant
- Jim Rickards on the state of play between China and the U.S…
- … and why the next six months will feel much like the last six
- China’s request of U.S. tech companies…
- … and how your privacy hangs in the balance
- Give it all away? Hold it all back? The 5 gets it from all sides
So… China’s President Xi Jinping is promising his government won’t devalue the yuan to boost exports. He said so last night at a banquet in Seattle — his first “big event” on a visit to the United States.
No matter the nationality of the politician, it always pays to read between the lines — as Jim Rickards did from Brazil…
So what’s that to you? Well, certain politicians who keep screaming about Chinese “currency manipulation” will tell you it’s a deliberate plan to undermine America. Meanwhile, certain “gurus” and websites want you to believe it’s all about the “end of the dollar” come next month.
As usual, the reality is more complex… and more interesting. With Jim Rickards’ help, let’s start peeling the onion…
Any discussion of China and the United States and the global currency war has to begin with a quick refresher on the SDR.
The SDR, or “special drawing right,” is a global super-currency issued by the International Monetary Fund. Just as the Federal Reserve can print dollars and the People’s Bank of China can print yuan, the IMF can print SDRs.
“The main difference,” Jim reminded us last month, “is that we can keep dollars or euros in our bank accounts or wallets, but SDRs are for countries only. They are added to national reserves by the IMF. SDRs can be swapped for dollars, euros, yen or other major currencies using a secret trading facility inside the IMF in Washington.”
The SDR is made up of four major global currencies, to wit…
With China being the world’s second-biggest economy and all, it’s only a matter of time before the yuan becomes part of the SDR “basket.” But getting there has been supremely complicated.
“The decision to include the yuan in the SDR basket is part of a larger power play between China and the U.S.,” Jim explains.
“Since 2009, China has been one of the biggest lenders to the IMF. In contrast, the U.S. has refused to fund its IMF lending commitments made at the G-20 Pittsburgh summit that year. The IMF has offered China greater voting rights commensurate with its size in the global economy, but the U.S. has refused to approve that change.
“In effect, the U.S. is holding China’s IMF ambitions hostage in order to force China to avoid cheapening the yuan. This strategy worked fairly well through most of 2014 and 2015. The yuan held steady at about 6.2 to $1.00. U.S. complaints about the Chinese as ‘currency manipulators’ died down.
“The problem was that in order for China to maintain the peg, it had to sell dollars and buy yuan in the markets. This was a form of monetary tightening because when a central bank buys its own currency, it reduces the money supply.
“China had to tighten because the Fed was talking tough about raising interest rates, which made the dollar stronger. If the dollar got stronger, given the yuan was pegged to the dollar, the yuan got stronger too. This contributed to the slowdown in the Chinese economy.”
You know the rest of the story: The pressure became too much and Chinese officials devalued the yuan on Aug. 11.
So what now?
Here’s where the IMF’s timetable becomes so crucial — and so widely misunderstood, especially by the “end of the dollar” screamers who’ve been insisting the IMF will add the yuan to the SDR next month.
“An October decision was never in the cards,” Jim tells us. “There is an IMF annual meeting in October (in Lima, Peru, this year, Oct. 9-11), but that’s not when decisions are made on SDRs. Those decisions are made by the Executive Board of the IMF.”
The Executive Board meets in November and will set a date of Sept. 30, 2016, for the yuan’s inclusion. It will meet again next March to make that decision official. (Hey, these people need excuses to get together every so often to scarf down caviar and guzzle champagne.)
“From now until next March, China has a free hand to weaken the yuan somewhat further,” says Jim.
“That will put more deflationary pressure on the U.S., make the U.S. dollar stronger and lead to added turmoil in U.S. equity markets as earnings suffer due to the strong dollar.
“Beginning next March, that process will reverse as portfolio managers lighten up on dollar exposure and increase yuan exposure to rebalance their portfolios ahead of the Sept. 30, 2016, deadline for the global currency reset.”
So you’re on notice — six more months of the U.S. economy being buffeted by deflationary forces, followed by a transition. But to what?
“China continues to acquire gold and SDRs to diversify away from the U.S. dollar,” Jim goes on. “This is all part of China’s preparation for the next global liquidity crisis.
“When that strikes, probably by 2018, there will be massive issuance of new SDRs, with both the U.S. and China in agreement.”
This would be only the fourth time in 50 years the IMF has issued new SDRs. “SDRs are issued at times of global financial panic when investors are dumping assets and scrambling for cash,” says Jim. The most recent episode, you won’t be surprised to know, was a few months after the Panic of ’08.
The next time the IMF issues new SDRs “will finally unleash the inflation that markets have feared since the Fed began printing money in 2008,” Jim forecasts. “The inflation the Fed failed to create will finally be created by the IMF using SDRs as the new global reserve currency.
“Massive issuance of SDRs in a future liquidity panic will be highly inflationary. These outcomes have enormous implications for investors with assets in U.S. dollars. Yet the process will be gradual and proceed in ways that markets barely notice, at least at first.”
And what, you might ask, would be the catalyst for the next global liquidity crisis? And how can you prepare? Jim lays out a four-step action plan when you follow this link.
To the markets… although there’s not much to say. After yesterday’s drubbing, the Dow and the S&P are down a bit; the Nasdaq and small-cap Russell 2000 are up a bit.
Gold has regained a bit of its mojo from last week — up $7 at last check, to $1,132. But the big mover in the precious metals complex is palladium; at $646 an ounce, it’s up 6.4% today on top of a 3% increase yesterday.
Crude for once isn’t making a big move; as we write, a barrel of West Texas Intermediate fetches $46.54.
Today’s the day the “flash PMI” numbers are out — giving us a snapshot of factory activity in the world’s big three economies so far during September. As a reminder, 50 marks the dividing line between growth and contraction…
- China: 47.0. That’s six straight months of below-50 readings. And this one’s the lowest since March 2009
- Eurozone: 53.9. Not bad, although it’s down a bit from the month before
- United States: 53.0. That’s a skootch below expectations and is unchanged from August.
Within the U.S. report, we see new orders are their slowest since January… and prices look especially weak. What was it we said earlier about deflationary forces?
Back to the Chinese president’s U.S. visit… and a story that has implications for your own privacy.
President Xi is meeting today in Seattle for the U.S.-China Internet Industry Forum. Executives from Apple, Google, Facebook, IBM and Microsoft will be there.
Last week, The New York Times reported the Chinese government sent a letter to U.S. tech companies — asking them to make a pledge that they won’t harm Chinese national security.
In practice, that might mean forcing Chinese Internet users to register with their real names… and storing their data within China, where the Chinese government could access it. You can see how this might open a human-rights can of worms.
“The letter,” according to the Times story, “also asks the American companies to ensure their products are ‘secure and controllable,’ a catchphrase that industry groups said could be used to force companies to build so-called back doors — which allow third-party access to systems — provide encryption keys or even hand over source code.”
Of course, the U.S. government doesn’t much like encryption either.
For the last year, the Obama administration — especially FBI Director James Comey — has been on the warpath against Apple and Google, furious that the newer versions of iOS and Android feature “end-to-end” encryption. That affords you immense security against hackers… but it also makes it impossible for the feds to read intercepted digital messages.
Earlier this month, Apple got a court order to hand over, in real-time, text messages sent between two iPhones as part of a guns-and-drugs investigation. Apple said sorry — it was no more able to decrypt the messages than anyone else.
The feds are urging Apple and Google to build a back door into their encryption products so the feds can get access when they want it.
Which sounds nice in theory. In reality, such access “will open doors through which criminals and malicious nation-states can attack the very individuals law enforcement seeks to defend,” according to a report this summer from a group of career cryptographers and computer scientists.
In other words, there’s no way to let the feds crack smartphone encryption without letting in hackers and other ne’er-do-wells too. The FBI wants a unicorn.
So how likely are the U.S. tech companies to go along with either the Chinese or U.S. governments?
As far as China goes, “They are going to hold off as long as possible,” says Adam Segal, a China specialist at the Council on Foreign Relations. “Apple can’t give a speech and talk about its commitment to privacy and then give in to China,” Segal tells The Intercept. “They can’t put up with the backlash that would hit them.”
But if and when the companies give in to the Chinese, Segal says all bets are off for Americans: U.S. law enforcement will scream for the same access, and likely get it.
Consider yourself warned…
We’re taking it from all sides in today’s mailbag… after we explained yesterday that while touting the track record of one our publications, “we purposely held back the names and ticker symbols out of respect to paying subscribers like yourself — you wouldn’t want us to just give it away, especially since we’re talking about positions that are still open, would you?”
“Absolutely we would!” a reader replies. “A week or so after you provide these ticker symbols and recommendations to your paying clientele, why not provide to all? Undoubtedly, some of the newsletter readers would purchase shares, driving up the price, supporting your recommendations.
“The only reason you wouldn’t print these ticker symbols and recommendations in The 5 Min. Forecast is that you want people to subscribe. Therefore, you are really putting your interests before that of your clients, and hence, you won’t print this email.”
The 5: Heh, nice variation on the old I-dare-you-to-print-this trick. Stand by — we’ll try to address your concerns along with everyone else’s.
“Funny you should say that,” writes another reader, “because you posted one of Jim Rickards’ Strategic Intelligence portfolio stocks to The Daily Reckoning several weeks ago.
“I called about it and all I got was excuses… so you do give some stocks away.”
“Your research is discussed and lauded,” writes yet another reader, “but specific recommendations are not given. They are only sold.
“Every day, Agora Financial has a plethora of services and newsletters to sell. My subscription was in the hopes of receiving specific investment recommendations. What I get is advertising, mingled with good ideas and just criticisms. But what I want is specific recommendations. I don’t want to subscribe to the several services sponsored by Agora.
“What is Agora? Is it a menu of the good stuff? I can get platitudes, opinion and criticisms from a myriad of sources. Many are available free of charge.”
The 5: Our long-standing policy has been that our analysis is free… but the specific recommendations you must pay for.
Once in a while, we do choose to share an investment recommendation from one of our paid publications as a gesture of goodwill — and on the theory that if the editor makes a strong case for that recommendation, you’ll be more inclined to subscribe for access to his other picks.
Usually, it’s something the editor recommended months earlier. Sometimes, it’s a $20 billion behemoth like Blackstone Group, recommended by Zach Scheidt. Sometimes it’s a smaller but still substantial company like Kennedy Wilson, recommended by Chris Mayer. Or it might be a mutual fund like WHOSX — which Jim Rickards likes as a play on Treasuries. It will never be an open options recommendation, such as you find in Currency Wars Alert; our customer-service people would never hear the end of it.
Bottom line — it’s a delicate balancing act, and something we consider on a case-by-case basis. Obviously, we can’t please everyone. But we always welcome your feedback and give it our careful consideration. Keep those virtual cards and letters comin’. (On that score, could it really be that no one took offense yesterday to our calling the chief of Turing Pharmaceuticals a d-bag?)
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. In the book of Romans…
Chapter 5, Verse 12…
The Bible names a grave medical curse…
From which no man or woman has ever escaped.
Yet did this upstart biotech just stumble on a cure?
Find the full story here… click to see the details.
