About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, September 30, 2010

US Dollar & China

US Dollar
Back in early June I argued that the dollar was getting overbought and wondered if it
would test longstanding resistance at 92 ($USD). Well it did not and it turned down
shortly after. Traders have been shorting the dollar on the premise of renewed
quantitative easing by the Fed and the credible assumption that othe major central
banks may not be prepared to follow suit. There are now a few reasons to think
about taking a long position in the dollar over the next few weeks. 1) It is deeply
oversold. ($USD Chart). 2) Based on recent signals from the Fed, it is far from
clear whether They would want to provide massive quantitative easing if the economy
falters, or whether they might move in a far more modest, piecemeal fashion (which
I believe they should do anyway). 3) I still think it could take another six months or so
before financial stress in the global economy unwinds enough to rule out another
"risk off" flight-to-quality rally in the dollar.

Since I started the blog in 2005, I have argued that China's heavy handed policy of
mercantilism was no longer appropriate and would harm them just as Japan's very
aggressive mercantilist trade policies hurt them. China has been far too slow to
install policies which would bring better balance to their own economy and It has
let the Party fatcats feast off the trade profits at the expense of its workforce. The
policy of rapid money growth within China to maintain the dollar peg produced a
stock market bubble in 2007 from which they have not recovered, and has fostered
speculation in real estate which could eventually become increasingly difficult to
control. Money growth has been so rapid that if I was a Chinese local, I would
regard the yuan as play money.

Trade tensions with the US are rising. Matters may quiet down after the  US election,
but China / US relations are now headed firmly downhill. The shame of it all
is that although China's GDP may now rank #2 in the world, its per capita income
is not even in the top 100. That represents piss poor progress.

I have attached a link to a piece by China based economist Mike Pettis which
discusses the formidable challenges China faces if it is to re-balance its economy
appropriately. Well worth reading. Pettis on China.

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