Exchange-rate strategies in Beijing in regards to the U.S. dollar, as well as thirteen other currencies, are still causing uncertainty and doubt.
The money in China, termed the yuan, has experienced a fall of around 3% against the dollar since the start of 2016.
During this same period, the yuan has fallen about 6% against 13 other currencies from around the world.
The graph below shows this drop:
Beijing has somehow allowed the yuan to press against the U.S. dollar during 2016 without causing an uproar of protests from its trading partners.
However, things seem to be changing as of late.
A larger depreciation against a much broader selection of currencies is garnering more and more attention.
This past weekend, there was a two-day meeting where Group of 20 finance chiefs gathered and discussed this recent depreciation of the yuan.
The meeting was held in Chengdu, a southwestern city in China.
During this conference, officials from a few of China’s major trading rivals expressed that they were having concerns due to the decline of the yuan, as seen this year.
The yuan has fallen almost 6% when compared to a group of thirteen separate currencies.
Out of these thirteen, the dollar, euro, and yen are included.
When isolated only to show the yuan against the dollar, there was a 3% drop.
The emergence of a weaker yuan against varying other currencies can cause Chinese exporters to have an advantage over those from different countries in global markets.
Taro Aso, the Japanese Finance Minister, spoke to reporters on Saturday and said that he told the Group of 20 to keep a close eye on the future direction of the yuan, along with the Chinese economy as a whole.
Privately other Western officials mentioned that they had offered advice to China, cautioning them against weakening the yuan broadly.
Both of these remarks illustrate that the exchange rates in China are continuing to be a great source of doubt and uncertainty for both investors and global policy makers.
The yuan has gone through two rounds of devaluations in the past year alone, which has triggered a swell of panic selling in markets all over the world.
This devaluation has also exacerbated the money flow being sent out of China.
The central bank in China has also improved its communication in regards to the mechanism that controls yuan-pricing.
This improvement has helped to ease the doubts and nervousness surrounding the most recent instance of yuan depreciation, which began in late May of this year.
Many of the economists within China have suggested that the yuan should be watched but allowed to continue to weaken while the country sees a slowing economy.
However, the People’s Bank of China has reported that they have had to be careful to monitor this weakening.
By keeping it gradual, they prevent the possibility of it leading to speeding up capital outflows.
The United Kingdom’s decision to leave the European Union on June 23, 2016, has assisted in speeding up the yuan’s descent due to the central bank benefitting from the expanding dollar to devalue the yuan.
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This led to the yuan weakening 1.6% against the dollar, as well as 1% against the other 13 currencies in the first two weeks after the decision for Britain to exit the EU, a move termed as Brexit.
When the United Kingdom made the choice to secede after a harrowing vote on whether or not to remain in the European Union, it led to many consequences on economies all over the world.
China and the yuan are just one of the many markets and currencies affected.
Last week, the central bank made the decision to keep the yuan mainly stable against the currency basket and guide it higher against the greenback.
This decision came right before the weekend G-20 meeting in Chengdu.
The exchange rate maneuvering in Beijing has been mainly driven by the dollar.
The PBOC focused on anchoring the yuan to the dollar while the greenback was weak, letting the yuan collapse against the basket.
On the opposite end of the spectrum, the PBOC allowed the yuan to weaken when the dollar advanced, leading to the yuan being kept mostly stable against the basket.
In 2016, the dollar has strengthened less than it has reduced, leading to a weaker yuan against the basket than against the dollar.
The graph below shows the China Exchange Rate Pressure from 2000 to 2016.
As one can see, it plummets near the end of 2015:
Chi Lo works as a China economist for BNP Paribas Investment Partners, which is the asset-management arm of the bank based in Paris.
Lo said that he continues to believe that the Chinese central bank only desires stability for the yuan because a continued weakening of the yuan could end up renewing capital outflows.
Analysts from Goldman Sachs Group Inc. say that there was an estimated jump to $49 billion in outflows last month from the $25 billion that occurred in May.
This increase is seen as a result of the decreasing yuan.
Lo also said that the thing they do not know is whether the PBOC desires a stable trade-weighted exchange rate or if they want a stable yuan-dollar rate, which would be measured and determined by the yuan’s value against the basket of currencies, which includes the euro, dollar, and yen.
Larry Hu, a China economist at Macquarie Group LTD., which is an investment bank based in Sydney, said that the combination of the rising depreciation of the yuan and the monthly trade surplus of around $50 billion in 2016 would most likely raise one or more concerns among the trading partners of China.
Due to pressure mounting from the rest of the world, as well as the declines and devaluations that the yuan has experienced and suffered from this year, Mr. Hu says that there is a very limited amount of room for any more yuan depreciation against the currency basket for the remainder of 2016.
As you can see below, China hit an unusually high trade surplus at the beginning of 2016 and the end of 2015, though the economy has been slowing for the majority of this year.
After the Group of 20 meeting that concluded on Sunday, which was led by China, the group reaffirmed its pledge to refrain from engaging in beggar-thy-neighbor devaluations.
A public statement by PBOC Governor Zhou Xiaochuan stated that the exchange rate of the yuan against the currency basket is stable and being kept that way.
This, he said, has led to an increased strengthening of the market confidence around the Chinese currency.
Another notable event occurred when a senior United States Treasury official made note of the fact that Beijing has recently intervened to prevent the yuan from seeing any further falls or decreases.
The United States welcomed this action and described it as not being the type of intervention that the U.S. would interpret as being designed to obtain an unfair or unwelcome advantage.
However, it is not to say that Washington has concluded in its attempts to push Beijing into continuing its exchange-rate reform.
The Treasury official remarked that because Beijing does not have full transparency on their intervention, it is challenging and difficult to have 100% confidence in them.
The graph below shows the consequences that Brexit, Britain’s exit from the EU, has caused within currencies around the globe, in particular, the yuan.
This could lead to exporting risks with the overseas sales, as well as a concern regarding the capital outflows.
– Since the start of 2016, currency in China has seen a fall when compared to both the dollar and a basket of around thirteen other currencies.
– Brexit has created an uproar in global markets and currencies everywhere. With a falling euro and economic upheaval all over Europe, it’s no wonder that Asia is suffering too due to the surging dollar.
– China has elected to attempt to control the yuan’s depreciation by keeping a close eye on the value to ease uncertainty from trade investors, as well as renewing capital outflows.
– After meeting over the past weekend in Chengdu, the G-20 came to the decision to refrain from any behavior that could fall under beggar-thy-neighbor devaluations.
– The United States Treasury seems to approve of China’s decision regarding their economy and actions following the depreciation of the yuan, though they warn that there is still not complete confidence in Beijing’s exchange rate program due to the lack of transparency.
– Some have cautioned China against trying to control the yuan and instead advise them to maintain stability while paying attention to the concerns coming from across the world.
DOJ Files Suit Against Google Over Anti-Competitive Behavior
After a nearly 16-month investigation, the Justice Department filed an antitrust lawsuit against Google, part of Alphabet. This is the first of likely a handful of lawsuits against one of the FAANG stocks.
The suit alleges that Google has engaged in anticompetitive conduct to preserve monopolies in search and search advertising. It is the most notable lawsuit on the grounds of anticompetitive behavior in nearly 20 years. The last one was when Microsoft had been sued by the government in 1998 accusing the software giant of unlawful monopolization.
The lawsuit alleges that Google is acting as a gatekeeper to the internet. It acts as such by creating exclusionary and interlocking business agreements that prevent competition. For example, the government says Google uses the billions of dollars it collects from advertisers to pay cell phone manufacturers to install Google as their preset, default search engine.
The DOJ lawsuit specifically points out that Google’s search application is preloaded on mobile phones running its popular Android operating system. It also points out the fact that this app can’t be deleted. The lawsuit adds that Google unlawfully prohibits competitors’ search applications from being preloaded on phones under revenue-sharing arrangements.
Keeping an Eye on Tech Companies
Large tech companies, like Alphabet’s Google, along with Facebook, Apple and Amazon, are in the crosshairs of legislators in Washington, D.C., who think that the government should have more control over how the companies operate.
In the U.S., nearly all state attorneys general are separately investigating Google. Eleven state attorneys general, all Republicans, joined the Justice Department’s case.
It’s not just Republicans who have a problem with Google’s actions. Democrats on a House antitrust subcommittee released a report this month saying all four tech giants wield monopoly power and recommending congressional action.
The company’s problems aren’t limited to US regulators, either. European Union regulators have also hit Google with three antitrust complaints and fined it about $9 billion. However, the lawsuits and fines have apparently done little to slow the company down.
Lawsuit Too Broad?
Amazingly, as news broke of the DOJ lawsuit, Google’s share price actually rose.
Fox Business’ Charlie Gasparino says it’s because investors think the lawsuit is too broad and will take years to litigate.
“When the news hit, when they read the complaint, let’s just say “underwhelmed” was the word of the day. Investors we are talking to are downplaying the impact of this suit on Google. They believe the suit, if you look at it, there’s a lot of heated language, but in terms of comparing to other anti-trust suits on tech, such as Microsoft that had really specific issues that Microsoft did to hurt a competitor… this lacks that type of specificity.”
He then added that even a worst-case scenario could be good for Google investors.
“They believe it’s too broad, they believe it’s going to take years to litigate, they believe Google has the financial resources to fight, and here’s the other interesting thing. They actually think that Google, even if you broke it up, and that’s the worst-case scenario, you could get a lot of value out of the sum of its parts,” said Gasparino.
Rickards: Get Ready For Deflation, And Here’s Where Gold Prices Are Headed
Yesterday we brought you the first part of an interview by James Rickards. In it, he gave his outlook on the stock market. He also shared his viewpoints on why the Federal Reserve can’t create inflation despite printing trillions of dollars.
Today we bring you the second part of the interview, where Rickards discusses why he thinks we are headed towards deflation and not inflation, why gold falls when the stock market falls, and where he sees gold prices headed.
Moving Toward Deflation?
He says we are headed toward deflation despite trillions of dollars in money printing. Rickards thinks it’s because we aren’t spending any of that money.
“The greatest danger in the macro-economy today is deflation, because declining labor force participation, declining productivity, most of all velocity. Velocity is the turnover of money. It doesn’t matter what the money supply is. If there’s not turnover, if there’s not lending and spending, if the people aren’t chasing the goods, you’re not going to get inflation. But velocity is a psychological phenomenon. How do you feel? Do you feel prosperous, do you feel confident, do you want to go out and buy dinner or drinks, or do you feel cautious, do you feel concerned, you saw your neighbor lose her job, you’re worried about losing your job, so you save more,” said Rickards.
He said the savings rate is still at levels well above anything we’ve seen historically here in the US.
“The evidence is people are saving more. We’re in a liquidity trap. Saving was sort of working its way up from 5% to 8%, in April it was 33%. In May it was still 25%, in June it was 17%. So savings can be a good thing in the long run, but in the short run savings comes out of consumption. If I make money I’m either going to spend it or save it. Well if I save more I spend less. So all the signs are pointed to deflation. They can say they want inflation and they can print all the money they want, it doesn’t mean they’re going to get it.”
There are two types of gold buyers according to Rickards. The “strong hands” will be around when gold runs to $15,00 per ounce.
“There are two kinds of buyers of gold or investors in gold generally. The strong hands and the weak hands. The strong hands don’t use a lot of leverage, they use cash or capital, they’re in it for the long haul, they’re not day traders, I mean I watch the tape because I’m an analyst, I do a lot of interviews about it and I write about it, but I’m not a day trader. I don’t get too euphoric if gold goes up, I don’t get depressed if it goes down. I know where it’s going in the long run, it’s going in the neighborhood of $15,000 an ounce.”
Not Out of the Ordinary
He doesn’t offer a timeframe for the massive run-up in gold prices. However, he says it isn’t uncommon for gold to sell off along the way.
“That doesn’t have to happen next year or the year after. That’s the trend. I like to remind people, if it’s going to $15,000 an ounce, which it is, it’s got to go to $3,000 – $4,000 – $5000 – $6,000 along the way. So that’s the long term trend, so I don’t worry about the wiggles. As far as the stock market is concerned, this happened in 2008, I remember the worst part of it in 2008 in September, October and November when the stock market was absolutely crashing, gold was going down. And I was getting all these calls, ‘Gold is a safe haven, how come it’s going down?'” he said.
“What happens is in a liquidity crisis, everybody sells everything, especially the weak hands. If you’re leveraged and you’re in the gold futures market and you’re long and the market is collapsing, you’ve got to sell and get out, you’ve got to cut your losses.”
“Strong Hands” Stepping In
When this happens and prices drop, Rickards says the “strong hands” step in and start buying.
“If you’re a leveraged player, you’ve got to either come up with cash for the margin, or you have to sell your position which makes it worse. So what people do is sell gold to get cash to meet the margin call on the stock losses. Or they’re on the wrong side of the gold market and they’re leveraged and they just sell to cut their losses. So it does go down, it’s highly predictable. But the strong hands are waiting. It’s like a lynx or a mountain lion hunt. They don’t stalk their prey, they just sit there and wait and then pounce. Strong hands are watching, they don’t jump in on day one, they wait until it goes down enough and then they come in and buy and it goes right back up again.”
Report: Biden’s Economic Plans Would Mean 5 Million US Jobs Lost, 10% GDP Drop
A Joe Biden presidency would destroy millions of jobs and derail the economic recovery from the coronavirus pandemic. This is according to a new report from the Hoover Institute at Stanford University.
The report says that based on the economic plans laid out by Biden, nearly 5 million Americans would lose their full-time job. Meanwhile, the country’s gross domestic product, the measure of its economic output, would drop by nearly 10% over the next decade.
These losses would trickle down to the average household. The median household income will fall by $6,500 per year by 2030, according to the report.
Derailing Economic Recovery?
The authors of the report lay out a laundry list of changes. These changes include reversing some of President Trump’s 2017 Tax Cuts And Jobs Act, a tax increase on corporations and high-income households and pass through entities, reversing much of the regulatory reform of the past three years as well as setting new environmental standards, and create or expand subsidies for health insurance and renewable energy.
When it comes to renewable energy, the report says that the proposal to cut our nation’s reliance on fossil fuels is “ambitious” and would require cutting electrical use back to levels not seen since 1979.
“These plans are ambitious. Unless people drive a lot less, the electrification of all, or even most, passenger vehicles would increase the per capita demand for electric power by about 25 percent at the same time that more than 70 percent of the baseline supply (i.e., electricity generated from fossil fuels) would be taken off line and another 11 percent (nuclear) would not expand. To put just the 25 percent in perspective: that is the amount of the cumulative increase in electricity generation per person since 1979, which is a period when nuclear and natural gas generation tripled.”
Taxing Wealthy Americans
To pay for most of these “ambitious” plans, Biden has already said he would significantly raise taxes on wealthy Americans. They, he says, include anyone who earns more than $400,000 per year, through higher taxes, an increase in the payroll tax that funds Social Security, and fewer tax deductions. He also plans on raising the corporate tax rate.
The Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania’s Wharton School, says nearly 80% of Biden’s proposed tax increases would affect the top 1% of earners in the United States. It will primarily do so through raising the top individual income tax bracket to 39.6% from 37% for those earning more than $400,000 annually.
That means an annual tax increase of nearly $300,000 for households in the top 1%, according to the Tax Policy Center, who say even middle-class families will see a tax increase under Biden’s plan.
Corporations would feel the pinch as Biden said he would raise the corporate tax rate from 21% to 28% on “day one.”
During an interview in September, Biden said, “I’d make the changes on the corporate taxes on day one. And the reason I’d make the changes to corporate taxes, it can raise $1.3 trillion if they just started paying 28% instead of 21%. What are they doing? They’re not hiring more people.”
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