Currency Wars, Bearings and the Chinese Yuan

Posted by Jeff 03/03/2016 0 Comment(s) The Bearing Market,

     Interest rates are supposed to measure risk.  In a free market economy, people would compete for investments with the safest investments getting the lowest interest rates.  With a solid business plan and a steady cash flow, a business could expect a low interest rate.  Someone wih a riskier plan gets a higher interest rate because of the higher liklihood of default.  Interest rates decide how money gets allocated and are the whole foundation of a capitalist economy.

     With interest rates having gone negative, all bets are off.  Currencies all around the world are trying to goose their economic performance with negative rates.  It started in Europe and has now moved to Japan.  Negative interest rates discourage money flows into a country, thus weakening a country's currency and making exports more competitive.  They also lower the debt burden for heavily indebted countries and discourage savings.

     Negative interest rates are also a sign that the currency wars are heating up.  When a country like Japan goes to negative interest rates, it essentially devalues their currency making their exports more competitive.  A weaker Yen means that Japanese goods become less expensive compared to Chinese goods.  When that happens, people start to think that the Chinese Yuan is going to have to be devalued to protect their export market.

     And when that happens, people start making bets that the Chinese Yuan will be devalued, and if those bets are large enough it can be a self-fulfilling prophecy.  For example, the time that George Soros "broke the Bank of England". he made a billion dollar bet that the British Pound was going to be devalued.  He started selling pounds and borrowing pounds to sell from anywhere he could.  When other banks and hedge funds got wind of what he was doing, they started doing the same thing.  This lead to huge negative pressure on the pound, which subsequently devalued and Soros made what is referred to in financial circles as a shit-ton of money.  It is how he became a billionaire.

     George Soros is now betting large on a Chinese devaluatoin of the Yuan.  However, wen he made his bet against the Pound, it was a blitzkrieg operation.  The British were weak and did not have anywhere near the foreign reserves that China has to defend its currency and the British broke in a day.  The Chinese are a much more formidable opponent and are warning Soros too tread carefully

     They have been accusing him and other funds of betting against their currency since early January.  Since then, the Yuan has been very stable.

  In fact, the Yuan has been very tightly bound over the last month.  The Chinese have very deep pockets but so does Soros and the rest of the hedge fund set.  And they can now borrow money at ridiculously low interest rates to bet again the Yuan. 

If they succeed and the Yuan devalues, it could mean lower bearing prices in 2016. 

However, economic fundamentals seem to matter little any more with everything dependant upon the action of the central banks.  With negative interest rates propogating all around the world, at what point does it all become Monopoly money?

Put your money in bearings.  They might just be a better store of value than either dollars or Yuan.



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