It Starts: Broad Retaliation Against China in Currency War

Wolf Street

by Wolf Richter 

August 20, 2015

The biggest global “tail risk” is China’s deteriorating economy and an emerging market debt crisis, according to BofA Merrill Lynch’s monthly poll of fund managers. And 48% of them were expecting the Fed to raise rates, despite languid growth and low inflation expectations.

Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.

This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear on Wednesday: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.

Hence a currency war.

It didn’t help that oil plunged nearly 5% to a new 6-year low, with WTI at $40.55 a barrel, after the EIA’s report of an “unexpected” crude oil inventory buildup in the US, now, during driving season when inventories are supposed to decline!

And copper dropped to $5,000 per ton for the first time since the Financial Crisis, down 20% so far this year. Copper is the ultimate industrial metal. China, which accounts for 45% of global copper consumption, is the bull’s eye of all the fretting about demand. 5,000 is the line in the sand. A big scary number. Other metals fared similarly.

Copper powerhouse Glencore, whose shares plunged nearly 10% on Wednesday, blamed “aggressive and synchronized large-scale short selling” for the copper debacle, instead of fundamentals. But fundamentals have been whacking copper for years, and shorts have simply been joyriding the trend.

CIA insider: This is the Key to Understanding the Yuan-Dollar Relationship

The Crux

From Jim Rickards

Editor, Currency Wars Alert

No one disputes the fact that Janet Yellen and her colleagues at the Federal Reserve are one of the most powerful influences on the world’s largest economy. Yet few analysts realize that she is the most powerful influence on the world’s two largest economies — to include China’s.

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.

This chain of relationships has numerous links. Let’s explore them one by one…

Yellen makes no secret of her desire to raise U.S. interest rates. She talks about this every chance she gets in speeches, press conferences and interviews. Rates have been zero for almost seven years, and it has been nine years since the last time the Fed raised rates.

This has led to endless speculation about the timing of the Fed rate increase. In late 2014, Wall Street said March. Then June. Now September. So far, Wall Street got it wrong every time.

We don’t engage in strung-out speculation on the Fed’s next move. We use specific indications and warnings and proven analytic methods used by the intelligence community including the CIA to solve problems of this type.

What the Heck is Going on in the Global Markets?

Kamal Salih Comments:

A perfect storm is brewing in the immediate horizon of the Malaysian economy.  I wanted to take comfort in pronouncements by the government leaders that, given our strong economic fundamentals, we (meaning government, business, exporters, importers and outbound travellers, ordinary consumers and folks) should face the blowing wind and ride out the oncoming storm.  It is not as bad as the 1997 financial crisis, they say, and we had learned enough and adjusted from that experience.  But the signs do not point to such self-indulgent confidence:  The Ringgit is today 4.60 to the US dollar and has now 5 in view (and the government has abstained from pegging), even though there's no Soros in sight; oil prices are testing US$40 and Budget predictions for the year are flying out the window; other commodities are following suit; and the sloshing foreign funds that had fuelled the stock market and property has long taken their money out.  And the GST has added more than its fair bite of living costs.  With the 1MDB scandal, vacillations over the RM2.6b issue, the cabinet just reshuffled and a gaping trust deficit in the government's ability to handle the issues, we are told to continue sipping our coffee and teh tarik.  Meanwhile, the over-dramatizers have been working overtime and predicting a momentous September.  You can talk up a storm, but you can't talk it down.  Our coffee cups are shaking...something's got to give!

To understand these massive shifts in the wind, I sought and share below with you three articles by Wolf Richter, of Currency Wars fame, to understand what's going on, and see where we can run for cover.

It Starts: Broad Retaliation Against China in Currency War
CIA insider: This is the Key to Understanding the Yuan-Dollar Relationship

What the Heck is Going On in the Global Markets! (Excerpted)

by Wolf Richter

Wolf Street

August 23, 2015

 “A Global Meltdown…”

That’s what Doug Short called it in his World Markets Weekend Update. All its eight indexes finished in the red for the week. India’s SENSEX, he points out, “was the top performer, down a ‘mere’ -2.5%.” For the rest, they ranged from the Nikkei’s -5.28% to the Shanghai Composite’s -11.54%. The China bubble and implosion (blue line) is the most salient feature this year. By comparison, the selloff this week looks practically benign:

And oil got hammered for the eighth week in a row.

It was the longest weekly losing streak since March 1986. And on Friday, West Texas Intermediate plunged below the $40-mark intraday, hitting $39.86 before bouncing off to take a breath at $40.29, the worst level since the Financial crisis.

Since mid-June, when the delusions of an oil rebound came to an abrupt end, WTI has plummeted 33.6%.

US drillers have accelerated their drilling programs again. Global production, powered by Saudi Arabia, Russia, the US, and especially Iraq – and soon Iran – gives off no substantive signs of slowing down. Hopes for global demand growth are hitting the realty of economic turmoil in China and elsewhere. Crude oil in storage has reached disconcerting levels for this time of the year. And people are starting to pray for miracles.

The overall commodity complex hit new multi-year lows this week. But gold has been an exception, rising from its own dismal multi-year low at the end of July.

Shocked and appalled that the market had somehow rediscovered this dastardly will of its own, Wall Street is already clamoring for ZIRP Infinity and QE4 Infinity, a real “infinity” this time, because everyone knows that at these ludicrous valuations, the market can never stand on its own two feet again, and folks simply don’t want to give up the trillions that the Fed has so magnanimously shoveled their way.

To top it off, currency turmoil tore into the emerging markets, and a debt crisis is starting to build up on the horizon. 

To Understand Malaysia's Economic Future, Look to Turkey NOT Greece

Comment:  Perhaps we should look away from the experience of Greece, with emphasis on the debt-to-GDP ratio, to see where Malaysia's macroeconomic future is heading, and instead to consider the Turkish situation over the 2002-2014 period.  Turkey's GDP per capita growth over the period is no better than Malaysia's over the period but comparable to all intents and purposes; what should concern us is the shift that both governments had adopted towards a consumption-based (and in our case, ominously) debt-driven economy.  Focus on the fact that Turkey had been effectively dissaving, while we are sustained over the same period only by a higher savings rate.   As GST bites into consumption expenditure, a similar process may set in over the medium term in our own situation unless serious reforms are undertaken to reverse current trends and reset the economy.  I republish below for your information Danny Rodrik's recent piece on his weblog.

Kamal Salih

Dani Rodrick: Turkish Economic Myths

Preparing for a panel discussion on Turkey gave me the opportunity of putting together some notes and slides on the country’s economy.

That Turkey is not doing well at the moment, economically or politically, is well known. But the roots of the problem remain misunderstood. Many analysts blame the weakening of “structural reforms” (on economics) and the turn towards authoritarianism after the Gezi protests in 2013 (on the politics). See for example here. In truth, Turkey’s problems on both fronts predate the recent slowdown in growth and have been long ingrained in the governing party’s (AKP) strategy. I have discussed the politics before at length. Here I focus on the economics.

First, let’s dispense with some misconceptions about how well the Turkish economy did under Erdogan. As the chart below shows, Turkey’s growth performance since 2002 (when AKP took over) has been middling. A 50% increase in per-capita GDP (at constant prices) is nothing to scoff at, but it is below what Sri Lanka, Bangladesh, Uruguay, Peru, Argentina, Ghana, Indonesia, Philippines and many others – not to mention China and India – have achieved. (And no, Turkey’s income did not triple over this period, as government officials claim.)

Source: IMF