Will China resolve it’s currency situation incrementally or in one fell swoop?
My friend Larry McDonald believes that the latter will happen, and that investors ought to be positioned to take advantage of the ensuing risk-off buying opportunity.
Here’s Larry from his latest Bear Traps note:
The Most Important Question for Investors Today
If the Fed really wants its three rate hikes this year, where does that put the US dollar and its ugly side effect, China currency outflows? If you can’t answer this question, you really have no business long US equities.
“In the end, we all sit at the banquet of our consequences”
– Robert Louis Stevenson
Ultimately, we believe China will “kitchen sink” devalue the yuan 10-15% in order to stop the bleeding. In other words, billionaires in China know the PBOC is trying to pull off a “controlled devaluation” over time, foolish central planning squared. If you knew your currency was going to substantially devalue over the next year, wouldn’t you exit, put your money in dollars? Of course. Instead of taking small bites of the apple, China will be forced to go “all in” and put a large scale devaluation behind them. This will create a great risk off buying opportunity, we must prepare to take advantage of it.
It’s clear, a rising US dollar is China’s worst enemy, that’s once expensive peg.
As we expressed in our Bear Traps reports last year, we believe China will devalue the yuan by 10% – 15% in 2016. Make no mistake about it, US equities’ fate is tied to the speed of the devaluation and the Fed’s desire to hike rates into a dramatically slower global growth economy.
Again, it’s no coincidence that February’s dollar plunge (99.80 to 95.22 in DXY) was followed with a China cash burn at $26 billion, the best in 3 months.
Real (immediate) credit risk tied to commodities and EM is at least $4 trillion globally, hence a dollar surge created a risk off in September and January. Despite what economists say, a stronger USD hurts the economy. ISM manufacturing has spent 4 consecutive months below 50, the longest run since 2009.
Josh here – worth chewing on as the dramatic FOMO rally / short squeeze heads into week 5…
If you want to hear more from Larry, sign up for his Bear Traps Report at the link below: