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Dan Mezick
07-21-2005, 07:26 AM
What's up (or down) with this? In my view this may be very inflationary for the $USD

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China to value yuan against basket of currencies By Steve Goldstein
LONDON (MarketWatch) -- The People's Bank of China said it'll dropping its yuan-dollar peg in favor of one vs. a basket of currencies. The daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%, while the trading prices of non-U.S. dollar currencies will be allowed to move in yet-to-be announced bands. "The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies," it said.

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NoTalent
07-21-2005, 09:54 AM
It means we need to get our a$$es down to Wal-Mart and pick up some cheap stuff before the prices rise!

I'm not sure how inflationary it would be since China holds so many of our dollars--they don't want to f*ck anything up since they are playing the game (they won't let it float too much too fast)

Dan Mezick
07-21-2005, 10:37 AM
Little by little...step one is the decoupling from the dollar.

Then incrementalism from there. Maybe the real estate market is not so crazy when viewed in terms of a rapidly inflating dollar. Loans are paid in cheaper dollars while you hold a hard asset that always has absolute value regardless of currency fluctuations.

Real estate is an inflation hedge. This may explain why it refuses to drop significantly.

NoTalent
07-21-2005, 02:24 PM
I'm on the fence on the real estate. I think there are overpriced areas, and I think a lot of inexperienced people who are using a lot of leverage to get into a house they cannot afford will be in trouble when the rates go up.

I'm not sure if there will be a huge crash though since people can hold on to their house. The problem is when people just walk away from their homes if they are upside down.

Another issue is loan originators pretty much are risk free. They approve anyone who walks through a door--take their 0.2-0.4% of the loan and then sell it to someone else (who bundles it up with other loans and then sells it to investors). I wish I could have gotten in on that /images/graemlins/grin.gif

It is an interesting time though, and I wish I had some sort of crystal ball to see how this whole mess will play out.

Dan Mezick
07-21-2005, 02:41 PM
The only way this ends is in a huge inflation. History says so. Planned inflation amounts to robbing anyone that does not have their money in play-- anyone with savings accounts, CDs, etc. Inflation benefits the government and their contractors. This group gets to spend the inflated cash (cheaper dollars) at current value-- before the new currency percolates through the system and drives up prices of everything. By the time Joe six pack gets the new money, everything is more expensive and gets a negative benefit.

Perhaps real estate is going up in dollar terms but actually just holding value on non-dollar terms. Real estate prices imply a massive increase in the money supply. Remember expansion of credit increases the money supply in certain respects. Easy credit is inflationary.

Take a look at the gold sector today for the idea they have about China's currencies decoupling from the dollar.

As of Thursday, typical gold/silver sector stocks. Most are up 2-3 percent today.

Symbol Last Change (%) Bid Ask Volume
NEM 38.55 1.13 (3.02) N/A N/A 3,920,500
CDE 3.53 0.07 (2.02) N/A N/A 1,717,900
PAAS 15.49 0.48 (3.20) 15.48 15.50 568,613
GLD 42.49 0.29 (0.69) N/A N/A 1,531,700
CEF 5.27 0.09 (1.74) N/A N/A 268,800

AceHigh
07-21-2005, 02:43 PM
[ QUOTE ]
Real estate is an inflation hedge. This may explain why it refuses to drop significantly.


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Plus Homebuilders don't use stuff from China, so Housing may seem a bargain (compared to TV's/computers/cars), the inflationary pressure may cause the FED to rethink raising rates. Anybody else think the market is reacting exactly wrong to this news?

AceHigh
07-21-2005, 02:45 PM
[ QUOTE ]
What's up (or down) with this? In my view this may be very inflationary for the $USD

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They have to sooner or later to join the WTO. It will lead to higher priced goods from China, combine that with high oil prices it could be very bad for US economy.

Dan Mezick
07-21-2005, 04:08 PM
The Fed cannot keep raising rates and I believe that a significant number of observers have concluded that effective mortgage rates will not exceed the effective inflation rate for the foreseeable future. Inflation is much higher than reported-- The Fed knows the numbers. The rate of change of inflation (pace) is also probably accelerating.

How much do you pay a gallon again?

laserboy
07-21-2005, 04:09 PM
The falling US dollar is not the only issue in play. You also need to consider the fact that we are in the midst of the greatest credit bubble in modern history.

Total Credit Market Debt vs. GDP (http://www.pimco.com/NR/rdonlyres/72E4EAA9-0BA2-4880-9A29-2D4F0D8142B7/1162/total.gif)

When billions of dollars of "pretend" money go up in smoke and mortgage lenders are no longer passing out loans like halloween candy, that will be by definition deflationary.

[ QUOTE ]
Another issue is loan originators pretty much are risk free. They approve anyone who walks through a door--take their 0.2-0.4% of the loan and then sell it to someone else (who bundles it up with other loans and then sells it to investors). I wish I could have gotten in on that


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Yes, but somebody eventually ends up holding those crappy loans. You think its a coincidence that Fannie Mae suddenly reports $10 Billion in derivative losses from "hedging" (that they tried to sweep under the rug)and are experiencing massive liquidity problems (they cut their dividend and skipped executive bonuses this year)?

The ponzi scheme cannot continue forever. I know this is hard to imagine, but there will come a time when mortgage lenders once again require home "owners" to pay back their loans.

laserboy
07-21-2005, 04:23 PM
I agree with you that easy credit is inflationary, but my view is that we have already experienced massive inflation. Look at the prices of housing, energy, education, and healthcare. Look at the current valuations in the bond and stock markets. We have already have years of easy credit and decades of the greatest expansionary boom of all time (debt driven, of course).

Historically credit bubbles end in deflationary busts. See the US in 1890's, US in 1930's, and Japan in 1990's. The government can lower interest rates all they want, but that will pale in comparison to credit markets drying up and impending banking crisis. When "money" (in our case, credit) is destroyed, that is by definition deflationary. Ask Japan about how planned inflation is working out for them.

That is not to say that the price of imports will go down, by the way. It is quite possible for the m3 money supply to decrease while prices rise for certain goods rise due to external supply and demand.

Bottom line: get your money out of the US pronto. Smart money like Buffett, Soros, Gates are already long gone.

NoTalent
07-21-2005, 04:45 PM
[ QUOTE ]
Yes, but somebody eventually ends up holding those crappy loans. You think its a coincidence that Fannie Mae suddenly reports $10 Billion in derivative losses from "hedging" (that they tried to sweep under the rug)and are experiencing massive liquidity problems (they cut their dividend and skipped executive bonuses this year)?

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I think we are in agreement here. I don't think it is a good thing at all and the people who invest in these are going to get hurt. It's hard to tell how many companies have their fingers in these MBS's.

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Bottom line: get your money out of the US pronto. Smart money like Buffett, Soros, Gates are already long gone.

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I've heard people say this a lot--but how would you recommend someone going about this? Do you just directly buy other currencies? Or some sort of funds that invest in others?

laserboy
07-21-2005, 05:17 PM
[ QUOTE ]
I've heard people say this a lot--but how would you recommend someone going about this? Do you just directly buy other currencies? Or some sort of funds that invest in others?

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The most investor friendly way to go about it would be to invest in international bond funds. A number of currencies offer much more attractive macroeconomic prospects while still offering higher interest rates. Brazil, for instance, offers 20%+ interest rates and has a kickass central banker.

Brazillian Real vs. US Dollar (http://finance.yahoo.com/currency/convert?amt=1&from=BRL&to=USD&submit=Convert)

Also Asian currencies may rise under the logic that their central banks no longer be forced to artificially devalue their currencies to stay competitive with Chinese imports.

Another strategy would be to buy commodities or commodity producers in anticipation of foreign countries increasing consumption and investing their reserves in gold or oil rather than declining dollars.

Or you could invest in foreign companies or ETF's under the logic that globalization will ultimately transfer wealth out of the hands of debtor nations like the US and into the hands of emerging creditor nations like China, India, and Brazil.

I recommend the book 3 Billion New Capitalists by Clyde Prestowitz if you are interested in this topic, though its not really an investment book.

Sniper
07-21-2005, 05:58 PM
[ QUOTE ]
in trouble when the rates go up.

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The fed has been raising rates and no significant upsurge in "trouble" has occurred.

Sniper
07-21-2005, 06:00 PM
[ QUOTE ]
Another issue is loan originators pretty much are risk free. They approve anyone who walks through a door--take their 0.2-0.4% of the loan and then sell it to someone else (who bundles it up with other loans and then sells it to investors). I wish I could have gotten in on that

[/ QUOTE ]

You Can!!!

Take a look at NLY

thuja
07-21-2005, 06:16 PM
China had a competitive advantage by artificially pegging its currency to the US dollar, its major trading partner. By not allowing it's currency to appreciate in the open market due to its high level of ecomonic growth, China became the low cost global manufacturing source. The revaluation of China's currency will slow its growth, by making it's exports more expensive. One possible side effect would be curtailing increased Chinese demand for oil.

What effect this will have on the US dollar remains to be seen. In the US gov't has been pushing China really hard behind the scenes to brake the currency peg.

As stated above the US currency has enough major issues of its own already: the current account deficit, the budget deficit, and the real estate asset bubble (Greenspan's legacy). The only thing needed to send the US currency into a freefall right now, would be if foreign investors on masse decided to stop refinacing the current account deficit through their ongoing purchases of US government securities.

US citizens should think seriously about protecting their personal wealth in the event of a drop in the US dollar. Think about diversification to reduce your risk exposure. If all your wealth is in the US, your portfolio is not divirsified.

Look at holding some other currencies such as the Euro, or holding stock of foreign companies. Gold is always an excellent hedge against currency depreciation. Gold tends to retain its value in crisises in real dollar terms. Oil also has intrinsic value as a desired global commodity. Oil is also good for diversification as it's commodity price is inversly co-related to the US stock exchanges.

How much you diversify depends on what probablity you assign to the US currency having a major devaluation in the medium term, but I would think at least 10% of your portfolio should non US dollar demoninated.

Dan Mezick
07-22-2005, 11:33 AM
Asian ETFs may benefit immediately from this play by China.
See them here. (http://finance.yahoo.com/q/cq?d=v1&s=ews+ewm+ewy+ewa)

Dan Mezick
07-22-2005, 11:39 AM
Good post.

You mentioned Treasuries. China will now need to purchase FEWER of these; this will have an upward effect on USA rates.

Also, the play here by China makes it easy for them to purchase stuff here (read: shares of energy and natural resource companies) and makes their merchandise more expensive here for US (WALMART) consumers.

One way to benefit is to consider shares in Asian ETFs which may be direct beneficiaries of the new imbalances created by gettnig rid of the dollar peg.

See EWS, EWM, EWY, EWA.

Short WALMART, long Asain ETFs sounds like the right idea.

adios
07-23-2005, 01:42 AM
Your logic is right if the Chineese really turn their currecy loose which I doubt seriously for many reasons. The WSJ had a good article on the front page today about the new policy. From the article:

China's central bank had for years bought enough dollars to keep the yuan pegged at about 8.28 to a U.S. dollar. In yesterday's move, it let the currency appreciate to 8.11 yuan to a dollar. Now China will limit the yuan's move each day to plus or minus 0.3% against the dollar. It will also allow the yuan to move by a degree it didn't specify against a handful of other currencies independent of its moves against the dollar. The government isn't saying the currency will move every day, or how much it will move over time.

Details of the basket setup will apparently be kept secret, since Beijing didn't say which currencies will be included. At the onset, the U.S. dollar is likely to remain most important. While it isn't clear just how much further China will allow its currency to appreciate, some economists see yesterday's decision as the start of a gradual move up in the yuan. J.P. Morgan Chase predicted the yuan will gain a further 5% by year-end.

Bond market rallied today. A perspective from a trader I respect:

1) China still depends on selling Wal Mart et al alot of crap .......... they can't really afford to have the USD collapse on them and i suspect folks realized that today as well as fact no currencies or %'s in that basket the Chines will peg to were ever ID'd meaning it could be very heavy weighted to USD .........

2) China owns billions in US Treasuries and MBS bonds ........ hurting the USD and driving rates higher in USA would be financial suicide for that position .

3) USA export to China ? ....... maybe lawyers and stockbrokers ? .......... i'm questionable that at the margin , a weaker dollar / stronger Yuan makes alot of American made stuff cheaper than Chinese made stuff ......

4) a stronger Yuan makes oil/copper/steel/etc that much cheaper ........ also makes US companies cheaper too ......... this part of the analysis strikes me as spot on and in part i suspect today why commodities doing OK

adios
07-23-2005, 01:59 AM
[ QUOTE ]
You think its a coincidence that Fannie Mae suddenly reports $10 Billion in derivative losses from "hedging" (that they tried to sweep under the rug)and are experiencing massive liquidity problems (they cut their dividend and skipped executive bonuses this year)?

[/ QUOTE ]

This was offset by gains in the underlying assets that were being hedged for the most part. My understanding is that the losses on the derivatives were not reported on the income statement originally because Fannie Mae stated that the hedge complied with FASB rules where the derivative losses need not be reported on the income statement if the hedge has a 92 percent or greater correlation to price movements in the underlying assets in the opposite direction. Upon further review the derivatives did not meet the 92% criteria and thus the losses in the derivatives were recognized on the income statement as the increase in the underlying assets were not for obvious reasons.

The real problems with Fannie Mae are these IMO:

1) The debt-to-equity ratio is too high (up to the moon) for many people's taste when their is an implied government bail out if problems arise. I believe that Fannie has had to reduce their debt-to-equity ratio. And this does have an impact on earnings.

2) An unclear strategy in employing derivatives to synthetically match the duration of the loans they make with the funding of those loans. Note that this is a different strategy than many other lenders employ.

Liquidity in the mortgage market is mostly due to the securitization of loans where investors can buy bonds and such that are backed by mortgages. As I've stated before I trust the ratings of MBS by the agencies more than I trust the ratings on corporates.

laserboy
07-23-2005, 02:49 PM
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Liquidity in the mortgage market is mostly due to the securitization of loans where investors can buy bonds and such that are backed by mortgages. As I've stated before I trust the ratings of MBS by the agencies more than I trust the ratings on corporates.

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In my opinion, the agency ratings are a sham. Why do Fannie Mae bonds carry the highest investment grade when, as you said, their debt to equity ratio is so high and they are having so much trouble maintaining their already absurdly low reserve requirements? That is hardly worth whatever paltry rate they are offering. They should be in the junk heap with Ford and GM.