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Emerging Market Mania: China Tells Bernanke to Take a Hike
Over the
last few months, I’ve noted that the most important monetary relationship in
the world is that between China and the US, the world’s largest creditor and
debtor countries respectively.
Both
countries’ central banks engaged in a money-printing orgy to counter the
Financial Crisis in 2008. Now they’re butting heads on the consequences of
their actions: the US Federal Reserve wants to create inflation, while China
wants to aggressively halt it.
This is IT,
the #1 dynamic for the financial markets going forward. How this plays out will
impact everything from the US Dollar’s reserve currency status to where the
stock markets will head.
With that in
mind, we need to consider the power dynamics between these two countries from a
monetary perspective.
China has
made it clear that it is NOT pleased with the US’s current monetary policy
(China has blamed the Fed for its inflation woes with some officials going so
far as to label the Dollar’s status as a reserve currency, “absurd”).
The US has
in turn responded by labeling China a currency manipulator and blaming it for
the US’s economic woes. Indeed, it seems almost every other week that some US
Government official comes out with a “it’s ALL China’s fault” statement.
However,
when push comes to shove, it is China that holds the trump cards in the form of
interest rates.
Many
commentators have posited that the US Federal Reserve will not hike interest
for several years. It is my contention that the Fed CANNOT raise rates EVER
again. The reason for this is that some 80% of the $600 TRILLION in over the
counter derivatives market is based on interest rates.
If even 4% of this is “at risk” and 10% of
it goes wrong you’ve wiped out ALL The equity at the five largest banks in the
US.
If you’re
looking for the REAL reason Ben Bernanke is scared stiff about state of the US
financial system and continues to pump money into Wall Street by the hundreds
of billions despite the fact the stock market has hit new highs from the March
2009 lows (when the Fed first announced its QE program), you’ve got it.
China, on
the other hand, not only WANTS to cool its monetary system, but CAN do
something about it. To whit, the People’s Republic has already hiked interest
rates once without warning on October 10 2010. Rumors are swirling that it’s
about to do this again over the coming weekend.
Why does
this matter?
Well, for
one thing this move, if it happens, will cool China’s “loose money” flow even
more, which will affect its economy: the economy the financial industry is
banking on pulling the world back into recovery.
Secondly, if
China hikes rates again, it would have an adverse effect on the world financial
markets pushing stocks and commodities down: an interest rate hike indicates
China is trying to cool its economy and so will have less demand for
commodities. And stocks, which are now just a single asset class that moves in
correlation to others thanks to the overly-computerized state of the markets,
will fall too.
And then of
course, there’s the $190+ trillion of interest rate-based derivatives sitting
on US commercial banks’ balance sheets. If China chooses to rock the interest
rate boat too heavily… KA-BOOM.
In plain
terms, China holds the trump cards when it comes to monetary policy. Ben
Bernanke better pray they don’t start playing them, because no matter how
“certain” he is off his abilities, he’s got the weaker hand. And he’s
definitely clueless about the risks of getting it wrong.
Good
Investing!
Graham
Summers
PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.
I call it The Financial Crisis “Round Two” Survival Kit.
And its 17 pages contain a wealth of information about portfolio protection,
which investments to own and how to take out Catastrophe Insurance on the stock
market (this “insurance” paid out triple digit gains in the Autumn of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
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Is this guy legit? I looked into his "free" special report. It's free with your subscription. His subscription rates are $299.99 quarterly, $598.99 Bi-Annualy, and $1,196.99 option 3.
Free with subscription purchase is not the same as Free.
Makes me question anything this guy says.
Don't know if he's legit or not. Guess i have to spend FRN's to find out. Not happening.
Far as i can tell the post is an ad. If he wants to send me a "FREE REPORT" ok fine. I'll probably read it. If it's exceptional, overwhelmingly brilliant, and/or makes me some $, then maybe i subscribe to his letter. If this is his sample, not interested. Not about to pay up front for a likely nothing (use-value).
Jim Rogers, China's biggest bull, ranted yesterday in NYC that all US banks should declare bankruptcy and default and causing a US depression. Yes, it would be painful for a few years but everything would be rosy in the long run. Is he a bit worried about his positions in China and that the POMO is causing China to increase rates thereby forcing a contraction in China which will hurt his positions. $SSEC has not moved in a month after a 10% correction which must be a concern in China while the US market move higher. Yesterday the near trillion tax cut will stimulate the US while using money borrowed from China. US scores on China. The EURO zone is sticking its head in the sand and will see continuing deflationary pressure and more hardship and deficits. US scores on the EURO zone.
The US is borrowing money from nobody. Their credit emissions are extortion notes sent to the other parts of the world. Extorters do not borrow, they take.
What is this article? There is nothing in it.
China is not pleased and what?
The US empire is playing the same card: they enjoy a monopoly on the world reserve currency, tied to a military network over the world. This results that even countries which extracts commodities need USD to buy the said commodities from themselves.
As long as this network exists, all the countries of the world will need USD to support themselves. No USD, no commodities. No commodities, society collapse.
Not true.. Other industrialized countries ostensible seem to be hostage to the USD but thinking that couldn't change is naive. At some point the "alternative" will become the more attractive path. If the world knows the USD is the cancer, and they know there will be pain either way, they may opt to go for the big move..
Who cares about industrialized countries?
More than the others, they need to import vast amount of resources to operate.
What matters is the smal fish at the bottom, the ones that export all the resources needed for the machinery to work.
All those countries are in the position of requiring USD to buy commodities from themselves. If they are in such position, so are all the countries buying from them.
What alternative? None is being implemented. All countries are focused on fleecing the most out of those small countries, to transfer as much as they can from those countries and therefore are heavily dependent on USD to carry out this endeavour.
This is a massive run on resources, trying to deplete resources before the others and the USD is the entry ticket to play the game.
Having the best cards doesn't always pay off.
Sometimes the game is changed; certainly what can be seen of it is posturing and nationalistic bluster.
The need for control over finite resources following a perpetual growth model requires some ability to
"Back it up". China has an increasingly large and advanced military complex that is not fettered in foward
deployments set-up and fully entangled with the last century's world powers. Default is and would be
impossible. FRNs will be valued ( printed ) accordingly, to acommodate the purchase of Treasuries which will
fund whatever extravagance is agreed to. Knowing who is the chump at the table , now thats valuable information
Bank holidays and 5%/day market drops coming; it's inevitable.
When will that start? I need to make some plans so I need a firm schedule on these moves. Thanking you in advance.
Most of us already panicked.
Panic now, or wait and do it when the herd does, it's your choice.
china has only itself to balme for importing inflation. If they unpegged, their inflation would go away. Their economy would also implode, but who really cares about that. Bernanke has a gun pointed to china's head. China has a pea shooter loaded with a spitball. China will lose.
Really? So other countries in the world do not import 'inflation' thanks to the US currency policy?
Reality: so far, the Chinese have implemented manipulations to protect themselves from the US currency policy. They are failing. Removing them will not help them.
No one was bitching when the Euro was .87USD. China is a large economy, their currency should float.
They don't want wages to rise, or for their inefficient manufacturing to become uncompetitive, so they peg to USD. They are indeed between a rock and a hard place.
China is going to increase interest rates by 0.25 basis points this weekend and another 3 hikes on 11th Feb, 11th April & 11th June making total 100 basis rise in 6 months.
source?
Pulled freshly from a dark place that shall remain secret.
He's been here 4 weeks. If his call is even close he'll bring it up in perpetuity. If he's wrong -- well, it fades into the blog black hole. How does he lose?
+10 Coon. Btw if you have seen the latest Southpark series superheroes you will know that the Coon is now one of the funnier animals getting about :)
Nice call and straight to the point!
I wish Helicopter Ben would do likewise. You cannot expunge household debt until safe, uncomplicated investment vehicles, (savings accounts, Money Mkts, et al..) pay interest rates that beat inflation by at least 1.5%.
China can easily export this inflation back by simply revalueing the rmb up.