"Change the"got" in your sentence into "get".
-James Altucher
Welcome to The Golden Sense! Due to travel and extensive work requirements The Golden Sense will be a different format this month. I wanted to share a Podcast by James Altucher regarding the power of the human brain and an article by Steve Brown from PCBB Bank Investment Daily about the recent volatile market action.
James Altucher Podcast:
The is an excellent podcast with Jim Kwik about the power of the human brain and the ability to use it beyond the realms of what people think currently possible. Enjoy:
http://www.jamesaltucher.com/2015/07/ep-121-jim-kwik-brain-coach-and-superhero/
PCBB Bank Investment Daily
Steve Brown
Beijing just won a bid to host the 2022 Winter Olympics,
making it the first city in the world to host both summer and winter Olympics.
Considering Beijing does not get much snow, it is likely to be a challenge to
pull off. Yangquing, where the ski competitions are planned be held, has an
average snow base depth of one centimeter. China has been involved in another
set of Olympic Games of late, and that is in trying to control the volatility
of its stock market and at the same time, devalue its currency versus other
global currencies.
Typically countries devalue their currencies when they
become overwhelmed with debt. Had Greece still used the Drachma instead of the
Euro, a large devaluation would have occurred naturally given their debt
levels, reducing lifestyles but also reducing the debt overall. Greece’s debt
is in Euros and therefore can’t be reduced naturally, and this is why the debt
problems there are so intractable. China does not have a debt problem like
Greece; their problem is a rapidly slowing economy. China has just massively
devalued its currency, through market forces and through government intervention.
In the past, China kept its currency artificially cheap and until 2005, they
pegged the yuan to the US Dollar. Since then, the yuan has been pegged to a
basket of currencies and the exchange rate fluctuates, but it is still actively
managed by the central bank.
The strong US economy (and the strong US dollar) versus the weak
Chinese economy are already exerting downward pressure on the yuan. So why
would the Chinese government do more?
The weaker currency basically puts Chinese goods on sale, so
if the currency falls 4% to 5% as it did over the past couple of weeks, it
serves as a 4% to 5% price reduction on the goods and services that China
exports to the US and other countries.
Currency devaluations can be inflationary internally, but
most countries (China included) would prefer that inflation were higher (it is
around 1.6% currently). China has invested heavily in housing, infrastructure
and industry and has a glut of almost everything. While economic growth is
still strong by US or European standards (6% to 7% a year), it is not enough to
create jobs for some 7mm new college graduates per year. Without enough jobs
for a rapidly advancing society in terms of education and skills, social unrest
can result.
The slowdown in the traditional Chinese economic drivers, exports
and heavy industry, is naturally driving the economy towards more consumer
driven and lighter manufacturing, signs of a more mature, more diverse economy.
The reversion to weakening the currency may indicate that China’s leadership is
nervous about the efficacy of the new strategy and is reverting back to
familiar tactics to try to control the markets and grow its economy. This is
why the Chinese stock market has been fluctuating more than 8% daily and has
experienced a precipitous drop in the past month. Last week, the drop in
Chinese stocks bled into US markets and stock prices have been pummeled. The
Dow Jones Industrial Average has dropped over 1,600 points
in the last 4 trading sessions, and although the market spent most of yesterday
in positive territory, prices fell 200 points by the close as market players
didn’t want to be invested overnight.
What does it mean for American consumers? It means Chinese made
goods will be cheaper, it also means US exporters, already struggling with the
strength of the dollar, will be negatively impacted. Investors’ 401Ks are
feeling real pain at this point. A cheap yuan strengthens the case for the Fed
to keep interest rates low in the US. The Federal Reserve is most interested in
the growing strength of the US economy and also wants to get interest rates
above zero, but this recent volatility probably takes a rate increase off the
table for September and maybe even for the rest of 2015. The Fed will be
watching carefully to see if this is a short term lurch, or if the downturn in
stock and commodity prices continues.
There won’t be any medals awarded in the Chinese Currency Olympics,
but we expect there will be plenty of volatility affecting markets everywhere
for some time. Hang on tight!
