As some of you may know, the Chinese currency (the Yuan or Renminbi) has been going through a significant devaluation in the last couple weeks — down about 3.5% according to Barron’s ( http://www.barrons.com ) — that is a significant drop for a major currency! Some currency watchers and economists have theorized that the Chinese government is trying to counter-act the Trump Tariffs by de-valuing their currency. Others have speculated that it’s simply market forces at work, as off-shore Renminbi has fallen in the wake of the collapse of the Chinese stock market….
My own opinion is that it’s probably a combination of the two….
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Back in 2015, I said this on the Forum and later in my blog:
“…The global elites of the largest economies work together to coordinate Plunge Protection Team (PPT) activities as needed around the world (those being the US, China, Japan and Europe). It is not just a US phenomenon any more, but a truly coordinated, global effort. The vehicle they use to implement PPT policies is mostly in manipulation of currencies.
“For example, China was on the verge of breakdown back in early February with its high debt, and its currency on the brink of a large devaluation…. and the global elites got together and decided they would let the Yen and Euro go higher and let the US dollar fall, because the Yuan is pegged to the dollar. By letting the $ fall, it would also allow the Yuan to devalue against most currencies without actually doing an official devaluation.
“In other words, a sleight-of-hand was pulled off by the global elites. With a falling dollar, the commodities have come roaring back, the Yuan has stabilized, and bond prices in high yield debt have stabilized.”
But things may not work so easily now! You see, President Trump does not consider himself to be part of the Global Elites. His economic policies often contradict the means and ends of the Elites. The IMF, led by Christine Lagarde, and the lead institution of the Elites in controlling world currencies, is stymied by Trump’s actions, imho!
Whereas the IMF and its silent partners in the large central banks would work together in the past to ease the stress on the Chinese currency, we no longer can say this may come to pass. Also, our own central bank, the US Federal Reserve, is now under the control of President Trump, with his appointee, Jay Powell, now in charge over there. There’s no Janet Yellen or Ben Bernanke around to coordinate a global response to a currency crisis.
So, how easily will the FED go along with the other central banks (the ECB, the BOJ and PBOC) and the IMF in working together to ease the pain on the Chinese economy?
I believe that Trump may call out the Chinese authorities if they let their currency fall much further without intervention by the PBOC. He might well accuse the Chinese of “weaponizing” their currency against the US dollar to overcome his Tariffs. This could create great fallout, and could prevent the Global Elites from coordinating the same rescues that they did in the past to save the Chinese economy.
You see, many Chinese businesses and local governments have accumulated large amounts of debt, and much of that debt is priced in US dollars. Also, many other emerging markets have their debt priced in US dollars too. In a crisis where the Chinese Yuan (and most non-US currencies) are depreciating rapidly, we could witness a massive bailout Chinese businesses using the large reserves that China owns. However, many of these reserves are invested in US Treasuries, so any bailout could lead to selloff in Treasuries as China raises cash.
Now, the Trump administration might give in to these global economic pressures and he might take the foot off the accelerator before things get too bad. This is, after all, a worse case scenario, and those rarely come to pass– but that doesn’t mean we may not see some panic in the near term!
So, what effect will this have on US stocks, should this come to pass? I think the short answer is that the picture would not be pretty for investors! For stock traders, shorting the market might be a successful strategy once the chart signals appear…and the use of the Vix products (financial volatility instruments ) to hedge portfolios or even profit off the situation might work.
And what about bond investors? Well, the short answer, unless the Chinese threaten “the nuclear option” of dumping US Treasuries, (which would be suicidal for them too), is that US Treasuries would be a safe haven during this affair, I would think.
The big question mark here are the gold traders. After all, a stronger dollar would mean a weaker gold price ordinarily. However, in a panic situation, the price of gold can remain stable or even rise against the dollar as gold becomes treated as an alternative currency and that currency might become “safer” than the dollar. Whether that happens or not, once the Trump administration blinks or once the Chinese back down, and everyone comes to terms, then gold may well rally with a weakening dollar in the compromise period after the crisis passes.
At any rate, things could get very interesting this 4th of July week, which is normally a quiet period for the US markets…but let’s remember one thing: US Independence Day is not a holiday in China or any of the Far East nations. If they are about to suffer a currency crisis, the calendar may not save them. And quite literally, the Trump administration and average Americans will be off to their mid-summer vacations while the real fireworks could quite literally be going off in other parts of the world and perhaps no one from the Trump administration will be willing to call off their vacation to stop the hemorrhaging?