Pro Perspectives 8/5/19

August 5, 2019

China made an important move in it's currency overnight.  It was clearly a political response to Trump's threat of tariff escalations.

That has sent some shock waves through global markets.  Let's talk about why it matters and how it may play out. 

It's nothing new to see China walking down the value of the yuan. Managing a weak yuan has been the centerpiece of the economic plan that has driven their ascent from relative insignificance, to the second largest economy in the world (over the past twenty-five years or so). 

So, predictably they've turned to their trusted economic tool, a weak currency, to offset tariffs.  Since Trump's bark turned into bite early last year, China has devalued the currency by 13% against the dollar in response to tariffs. 

This has been expected, and it has happened, but it becomes concerning for global market stability when the prospects of a big one-off devaluation increase.  And that's what happened overnight.  That's why global markets have been shaken. 

Remember, back in August of 2015, the Chinese surprised markets with a devaluation of the yuan.  It was (also) a modest adjustment in the currency, but global markets fell sharply on the prospects that a big one-off devaluation may follow, to support their flagging economy. 

It didn't happen then and shouldn't happen now.  It would be a deadly move for China. It would be an affront to, not just the U.S, but to all global trading partners.  And that would likely induce a more global response against China's trade advantage.  China would be put in the global penalty box.  That would be damaging for the global economy, but the biggest loser would be China.  

With that, I suspect this will prove to be a warning shot.  And perhaps it will bring both parties (the U.S. and China) back to the negotiating table this month (i.e. sooner rather than later). 

In the meantime, as we've discussed in my daily notes, Bitcoin continues to be among the big winners when the yuan is weakening. Bitcoin was up 13% today.   As I've said, the rise in Bitcoin has everything to do with money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption. 

Bitcoin futures and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens, allowing them to circumvent government capital controls (which restrict individuals from moving more than $50,000 out of the country a year).  

With that, as we've discussed, the Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal. 

In addition to the yuan, the chart to watch tomorrow (and overnight) will be U.S. stocks.

If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here