China starts to wonder if it made the right choice
Today's Financial News - Posted March 13, 2009
China wants a guarantee that the American currency is solid. If our currency begins to falter, the exporter will feel incredible economic pain. It is prepared to do everything it can to ensure its $2 trillion currency reserves are safe.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The idea of a four-day rally is fizzling out this afternoon. But the mediocrity in all three major indices is not for the right reason. If the markets were thinking logically, we would be in a much worse situation.
The markets are barely moving as investors lock in a week’s worth of profits in order to avoid the risk of holding any shaky positions through the weekend. It is a smart strategy and one I used as the reason to lock in gains and sell a couple of positions this morning at Hot Stock Confidential and TFN Strategic Trader. (By the way, we sold Bank of America (NYSE:BAC) for gains of over 60%!)
It is the news out of China that should have traders hitting the sell button today. The country, that holds a huge portion of the nation’s debt, is starting to question America’s borrowing levels. The U.S. was once thought of as a sure thing, but now our lenders are starting to wonder.
After spending several trillion dollars in less than two months, I am starting to wonder as well.
As you probably know, China has the world’s largest currency reserves. It is the product of exporting trillions of dollars worth of goods to America. Almost all of the $2 trillion reserve is held in American dollars.
In other words, the country has an incredible stake in the American economy, especially the value of its currency.
Talk about diversification
If this country goes printing all sorts of money, China’s savings will waste away to nothing. That does not help the Asian country sleep well at night. It is now asking the U.S. government to take action and “guarantee the safety of Chinese assets.”
Even if it is a rather hollow request, it is symbolically huge.
I equate it to yesterday’s news that General Electric (NYSE:GE) got its credit rating cut. The downgrade was minute, but proved the once-great company has fallen into fallible territory. Just like GE, the United States is nowhere close to defaulting, but our creditors are starting to have a case of the what-ifs.
China has a lot on the line, politically and economically. It needs 8% growth to keep rioters out of the streets and it needs a relatively strong dollar to stay financially solvent. You can bet it is willing to take desperate measures if it begins to notice any signs of failure.
If we see the value of the dollar start to slowly tick to the downside, expect to see China start manipulating its currency in the same direction. As a major exporter, the cheaper the yuan, the stronger its economy.
It may not happen this month or even next year, but I am positive China and the United States will eventually become dangerously involved in some sort of financial war. Right now, China has all the ammunition it needs to force us to wave the white flag.
If today’s news is an indication, China knows it and is ready to prove it. Movement on this idea will do far more damage to the Dow than any end-of-week profit taking.
Unless we kick our addiction to foreign debt, it could get downright ugly.
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March 14th, 2009 at 6:39 pm
Actually, this is good for the stock market, as it puts pressure on those holding bonds to invest their money elsewhere. Also, a weaker dollar is also better for the U.S economy as well, but unfortunately, the opposite is happening to the extremes of deleveraging bringing putting the economy in a state of deflation.