Currency Pegs & Their Risks
The devaluation of the Chinese renminbi (Yuan) raises serious implications both economically and politically. The mere fact that a peg exists allows for political criticism as if this were some currency war. First, China acted with devaluing the renminbi for its economy to remain on an even keel, trying to keep growth and employment high. Secondly, China acted to help make its currency a pre-eminent global currency which helps promote the country’s diplomatic goals and solidify the country’s centrality to the global economy. However, these two goals can also emerge in conflict with one another.
Currency pegs are dangerous for they can produce the wrong political implications. A 5% swing in currency value is no big deal in the markets as with dollar/euro. However, simply because China has a managed float (peg) they run the risk of being accused of creating a currency war with just a 2% adjustment. Pegs can over-shoot as well as under-shoot and either can be economically disruptive. We saw what happened to the Swiss Peg and then there were the pegs in Southeast Asia that facilitated the Asian Currency Crisis of 1997. In both cases, the governments lost a fortune because pegs provide a stop-loos to foreign capital.
China should move to a full float now for the high in the renminbi (Yuan) took place with a 19 year decline in the dollar forming the 2013 low. The majority seem to have been surprised by the dollar rally (devaluation) only because they seemed to have overlooked the fact that the low was clearly made in 2013 and an uptrend was already in motion.
China is being blamed wrongly for a devaluation when in fact the trend was already in motion in the market and the economy. Floating the renminbi now will eliminate the blame that the trend is being manufactured by China when in fact this is a dollar bull market unfolding globally.
Buy & Hold Strategy – Only For Fools?
QUESTION: Dear Mr. Martin Armstrong:
Thanks for teaching me, that there are no conspiracy theories created by any Rothschild or Rochefeller, in order to manipulate the markets.
What do you think about the Warren Buffett´s strategy of “buy and hold”?. This strategy is against all cycles!.
I look forward to hearing from you as soon as possible.
Sincerely,
ANSWER: That so-called strategy of buy and hold works only during the uptrend in a cycle. For example, Donald Trump made a lot of money, but each time there was a crash in real estate, he got into trouble. That is the buy-and-hold. Warren Buffet got caught buying silver in 1997/1998, and claimed he was not manipulating markets but making a long-term investment. He had sold out that position and did not hold it for the rally into 2011.
If you bought the stock market and held for the 1929 crash, it was not until November 1954 before the Dow exceeded the 1929 high. That was 25 years and 2 months or nearly 3 x 8.6 (25.8).
In the case of gold, it took until January 2008 to exceed the 1980 high. That was 28 years to wait and then this is only in nominal terms, Adjusted for inflation and in both cases it was much longer and in gold it still has not exceeded the 1980 high.
Why is it so Hard for the West to See That Everything is Connected?
QUESTION: Marty, you have written many times how everything is connected and how in Asian culture that is the foundation of all understanding. Why is it so hard in the West to comprehend this fundamental concept?
All the best
GD
ANSWER: I think it is all part of the idea that we can alter society by forcing it to do as we desire. Politics are based upon this. Socialism is all about robbing one class to benefit the other. There is no comprehension that everything is connected and this permeates analysis as well. This is not my personal discovery for many have seen these connections in Eastern philosophies. In economics, politicians are not interested in such realizations for it means they are not the masters of the universe.
Take Obama’s policy against Russia. He has effectively disrupted everything around Europe and the consequences are refugees pouring into Europe and sanctions that have hurt European farmers and the economy. It is not deliberate, but it is reckless for there is no recognition of how everything is connected.
Every action has a consequence. The Fed lowered rates to help the banks, but that crisis is over and the consequence has been to create the next crisis — the defaults of pensions and insurance companies that require high interest rates. So many regulations require pension funds to own government bonds; these regulations have set the stage for the next crisis.
We cannot escape this connectivity. Whatever action we take has a consequence. It is impossible to manipulate markets and the economy for there will always be unintended collateral damage. We are living in the era that will bring about the collapse of socialism, precisely as took place in communism. Government is incapable of ever managing society for they cannot escape the interconnectivity.
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