China’s Yuan Devaluation – Bracing For Impact; Shadow of Truth Market Update

TND Podcast Spotlight:  Shadow of Truth

Note:   Below this commentary is a Shadow of Truth “Market Update” in which Rory and I discuss possible reasons – besides the obvious – for why China is devaluing its currency. 

China began devaluing its currency two nights ago in a move that took the markets by surprise, judging from the reaction of the U.S. stock market and the precious metals.  While there are many obvious reasons for China to devalue its currency in relation to global currencies, ultimately I believe it’s China’s strategy of bracing for the impact of a global economic depression and the collapse of highly overvalued stock and bonds markets globally.  The latter of which resulted primarily from U.S., Japanese, European and Chinese money printing in unprecedented size and scope.

I find it amusing how analysts and the media in the U.S. are constantly pointing at Japan, Europe and China to demonstrate relative economic weakness and financial overvaluations.   In fact, when Rory and I were in the middle of recording our discussion on this issue, Marketwatch dispatched this article:   China could trigger the biggest financial rout since 2008.

With the media and most financial analysts it’s always the straw that broke the camel’s back that was the cause of a catastrophe, not the fact that the camel’s back was already insidiously overburdened with destructive weight…

But let’s look at this in the context of the overall, big picture.

This could be the black swan everyone one has been straining to see.  I view China’s move differently than desperation on China’s part.  I think it’s a brilliant defensive move by China.  Yes,  China has issues but the issues are no different or worse than the issues infecting the U.S. system.

While the financial “Einsteins” in this country point toward China’s massive sovereign debt, corporate corruption, market overvaluations and $15 trillion “shadow” banking system, no one puts the assertions in the context of the same issues in the U.S.  Using combined public, private and contingent liability debt of at least $200 trillion, the U.S. has by far the largest debt obligations in the history of the known universe. The U.S. “shadow” banking system is estimated to be in excess of $24 trillion.

Everyone overlooks this: China has a massive sovereign “cushion” of $3.6 trillion in foreign currency reserves PLUS god knows how much gold.  The U.S. has neither to cushion the blow coming.   A friend of mine stated it elegantly:  “China is bracing for impact.”   The U.S. is not prepared for impact.  “Impact” = the economic depression and financial collapse hurling toward the world.

Here’s another aspect to what China is doing that everyone seems to forget:  China started taking measures to deflate their bubble roughly a year ago.  They’ve raised certain bank lending rates and they’ve raised capital reserve ratios.   The U.S. has continued to intervene fully in U.S. markets and it’s continued keep the bubbles here inflated.

I believe China’s move was to hasten the process of deflating its own bubbles before everyone else’s bubbles blow-up by market forces. The people in China own gold.  The people in the U.S.?   Mortgage, auto, credit card and student loan debt.

China is getting the ball rolling on the inevitable.  A prisoner’s dilemma of sorts in which China is the first to spill the beans as means of minimizing the consequences on its system when the global financial collapse hits the system – again.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund. 

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