China & The Dollar

[Dan Mezick]

What's up (or down) with this? In my view this may be very inflationary for the $USD

[ QUOTE ]
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]

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]

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]

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 [img]/images/graemlins/grin.gif[/img]

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]

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

[laserboy]

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.

[laserboy]

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

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.

[adios]

[ 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)?

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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.

[Sniper]

[ 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]

[ 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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You Can!!!

Take a look at NLY