Monday, 25 May 2009

"Dollar Trap" snaps shut

One of the most intriguing political games being played out at the moment is the ongoing "death grip" between China and US over China's massive (and growing) holdings of US paper.

Both countries stand to suffer massive losses if either country deviates off the current, unsustainable path. How China and the US can get out of this is not clear to me but the only answer I can see if for there be a slow unwinding of positions over 5 to 10 years. Speculators will not make this easy.

I happen to believe the dollar will come under increasing pressure and opens up some interesting futures trading opportunities although there are other good FEX deals out there at the moment (on which more another day).

Stick the following title into google to read the whole story.

China Stuck in "dollar" trap [FT]

"China's official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing's increasingly vocal fear of a dollar collapse".

The article goes on to say that China has little choice but to keep buying US paper. It is in a dollar trap. The massive volumes involved means that Chinese buying of any other currency would distort the market. Likewise, selling dollars would cause a collapse in the dollar.

I suspect Chinese outbound FDI will increase with less emphasis on US paper but this will be a long process. Look what happened to Japan when it went down this route in the early 90s.

China is overextending itself and its expertise.

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6 comments:

Anonymous said...

Asia Chronicle has been talking about this as of late - China is no longer an isolated Asian power but a major producer of economic growth in the region. Its economy requires close attention from the West. You ought to check out Asia Chronicle, www.asiachroniclenews.com

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Matt at anarchy Japan said...

If the assumptions given in this line of thought are correct, then the reasoning doesn't follow.

If the dollar has lost it's value, then the sooner it is sold the better (here I'm also including treasury bonds and so on).

Consider a company owned by 10 different shareholders. The company is bleeding and headed towards bankruptcy. However, the value of the stock is still high? Why? Because no one is selling it. Well, should the 10 shareholders continue to not sell the stock so that it's value remain high? They might for a while, if they all know each other. There might be political considerations of a sort. But how does this really help them?

Sooner or later someone attempts to head for the door, then there is a rush, followed by a panic. Why would the dollar be any different here? (Given the grave assumptions given already.)

Obviously there are political considerations on all sides of this that go against what the straight economic solution would suggest.

Consider this, China might lose wealth by selling it's dollars, but at least China could continue to produce things. They'll lack buyers at first, but as prices come down, locals will be able to buy those goods (and production will shift towards them.)

The main situation would be the new political frontier developing in an America where the dollar has lost most it's value. A scary thought, and I guess Chinese leaders are aware of this as well. As things stand now, they still have some political clout in America.

JOSE LUIS REVILLA ESCUDERO said...

US Public Deficit: the end of the USDollar.


39 banks rescued by the government in the US.
A manipulated "stress test" to avoid big impacts in the stock exchange.

Interest rates at 0%.
Larry Summers, ex-Wall Streeter, commanding the situation.

Dollar at its lowest against major currencies.
China, Rusia, and the Middle East countries claiming for a new world reference currency.

Obama trying to fear big US corporations not to evade taxes in key offshore financial centres.

China thinking about the possibility of converting all its T-bonds into other currencies investments, to avoid its dramatic exposure to US dollars. Driving therefore, in this likely scenario, to a huge drop in the US dollar quotation.

Tim Geithner protecting Citi and Bank of America from bankruptcy.

Has anyone thought about the huge US Public Deficit ?... My friends, taxes will for sure rise for the high incomers.So, where is JOE THE PLUMBER ?



Are we really that good ?
Does Mr Obama´s optimism draw the real situation ?
Are we playing media games again ?


According to the international markets evolution during the last two weeks, it seems the worst has passed by. Indexes around the globe have picked up the lost ground during the last 6 months.
The first quarter results I referred to in my previous article " BEARISH SEASON is over", seem to have kept this suspicious optimism.

But, my vision about it, as a private wealth manager, is resumed in one single question:
What´s next, folks ??

The financial recovery will seed the real economy future evolution ??... Or the real economy will continue suffering much longer ???

Since I have to give an answer to my customers almost everyday, I decided to begin buying partial stocks in key "rescued" banking institutions, reinforcing this strategy with defensive companies, such as pharma companies with some due "blockbusters" to be released, and some high yield utilities corporations.

Obviously, equity not accounting for more than a 15% of the total investments.




My worries now stand at the point if politicians, economists, experts, advisors, ... are not really doing the same that supposely created the current turmoil... that for some people, it is the worst financial crisis in history. That is:

1) Money at 0%. That means, pure savings are no longer an option again.

2) Improve consumer rates. That means, to come back again to the exhacerbated consumer feeling, helped by money at 0%.

3) Rescued banks. No penalty for their wrong doing.

4) To ease monthly payments to those with forclosures risk.

5) To provide a social insurance policy, to avoid huge monthly medical payments... So, the money till now invested in these insurances, will go directly into the consumption of other goods. This, together with the "cheap money", more inflation.

6) A huge Public Deficit.



Don´t you think that maybe we are saving the kids from dying into the river, by creating the conditions of a future tsunami ?




Jose Luis Revilla Escudero
President
WWShares, Inc
www.worldwideshares.blogspot.com

AMIT said...

Good post about this details.

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Philip said...

he company is bleeding and headed towards bankruptcy. However, the value of the stock is still high? Why? Because no one is selling it.CFinance Dollar