I think the Yuan devaluation will be on similar in global financial destruction to what the US housing bubble did.
From companies, to investors, to governments, the world is more invested in the current central banking facade than it realizes and China’s devaluation threatens to undo it.
Don’t take my word for it. Just look around the world.
Europe is on the verge of another sovereign debt crisis, with the migrant crisis thrown in. And this is in the face of the massive QE program that I said almost a year ago to the day would fail and it has. The euro hasn’t fallen enough, and equities have crashed while credit risk has surged!
Japan is still Japaning all over the place, stuck in its deflationary trap.
Brazil is undergoing a sovereign debt crisis.
Canada and Australia with the most indebted private sectors in the globe are about to feel the double edged sword that is Chinese Overcapacity.
The United States by the end of the year, will probably grow at less than 1.5%. With US companies borrowing trillions of dollars to buy back their own stock, any significant drawdown will make these positive investments turn into heavy burdens.
Global commodity producers are struggling as multi-decade lows in commodity prices have rendered every investment they’ve made over the past decade uneconomical.
The Middle East is bloated with crashing economies clashing with each other.
The fact remains, that the world is a lot more volatile and fragile than central bankers would have you believe, and the next major shock will set it over the edge.
There is a slight difference from 2008 to now. Unlike 2008, QE has been established and some major banks are already actively involved in QE so I think the real difference between this crisis and 08 will be the speed at which central banks act, specifically the ECB and the BOJ.
I’m still a little worried about how quickly the Fed will react here and maybe we’ll get a better clue when Yellen speaks on Wednesday.
But the fact remains that a devaluation in the Yuan will send a shockwave through the $9trillion dollar global carry trade and there will be an absolutely enormous short squeeze on the dollar in emerging markets at the same time, asset prices in the world will engage in a huge sell off which will put further pressure on other carry trades in the Yen and Euro.
As they see their currencies rising, the ECB and the BOJ will also ease. Leaving the dollar the only game in town. Yellen will be forced to launch QE4 on a massive scale to devalue the dollar.
So the Chinese Yuan devaluation will reignite the global currency race to the bottom. Only this time, every nation’s currency will be thrown out of the windows with lead weights attached to them.
And then through all this, gold and silver finally break out of their slump and prepare for one of the largest gold bull markets in history.
In short, the global economy in 2016 is setting up for a giant liquidity crisis. At this point, I think it’s unavoidable. The Fed could come out on Wednesday and announce that it will double its balance sheet by the end of 2016 and that still wouldn’t save the Yuan.
China has committed to restructuring it’s economy. In order to do so, it believes it must impose stricter capital controls. If you can’t get your money out, then no one will want to bring their money in, which will deter flows from coming into China.
With all that said, I believe that China’s Yuan devaluation and the global liquidity crisis in 2016 is unavoidable. Once again I reiterate my fondness for US treasuries, gold, equity shorts, and cash.