"The future is no place to place your better days." Dave Matthews
China is not your usual case study. I had to do some thinking before weighing in on the devaluation. The markets made up their mind faster than the explosion in "China Experts" available for Tv comments. First, I thought back to the Ring of Fire implosion triggered by the Thai Baht move in 1997. Massive amounts of capital had flowed into the countries with very few gates. The Thai government found it easier to borrow in dollars and did so at redonk speeds. The move started a cascading effect through the other exotic areas, formerly known as Tigers.
China, on the other hand, has borrowed primarily in Renminbi. Although some dollar deals have sprung up, the debt binge is mostly their fiat. The Red Nation has also been able to straddle the commie/capitalist line by having fairly strict capital gates and demanding fixed investment over hot money. The Yuan has slowly, steadily opened up and risen. (Recall a post last year where we suggested floating it because, after an initial flurry, the currency most likely would have fallen backward.)
So, Alpert and Gross are quick to sell the "Exporting Deflation" meme. Citi (I think its funny they still exist, let alone pump out research missives) says the move will cause "something big and ugly" (not big and ugly like you operating an insolvent balance sheet and being a big player in the worst financial crisis in modern times, right Citi?) They have finally figured it's ALL ABOUT THE POSITIONS. Oz didn't give anything to the Tin Man and China can't export what they don't have. Will disinflationary pressures increase? Yes, of course. Will they cause the US to tip over to De instead of Dis? Doubtful. Who is/should be soiling their undies? Europe.
I'm not prepared to say the move is bullish. I'm not quite sure China will continue to balance the nasty forces of capitalist wealth and government control they've been so adept at so far. I've always leaned on a populist uprising over an economic meltdown..hey, maybe we'll get both! Bottom line, we still see an angry mob of money embracing, hoarding and idolizing the disinflation/deflation story 35 years into it. As we said yesterday, this is as it must be. The disdain for Bonds at 8.5% REAL yields was near universal and memory persistent. Consider Rick Santelli, so influenced by the anomaly, he still opines for Treasury yields of unrealistic return and refers to appropriately priced rates as "a destruction of savers."
We remain early adopters of and loyalists to the Abundance Economics theory, As observers of market cycles, we know theories wave into shorter term realities that question their validity. The World seems to fear another debt depression and deflationary flush, my gut tells me to be skeptical. Then again, I did have Chinese food last night.