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The Great Wall Of Money

Excerpted from Hindesight Letters (authored by Ben Davis),

The Great Wall Of Money.

China is in severe trouble and that trouble has already been reverberating around EM exporters for a number of years. It is just one of many dollar currency peg countries that have experienced tightening conditions because of higher US interest rate guidance and dollar strength. An unwelcome addition to their own domestic issues, but always a circular outcome, as they are inextricably linked to the US by their Bretton Woods II relationship. By devaluing and thus de-stabilising the 'nominal' anchor for Asian exchange rates, they will crush the growth engine of the developed countries on whose consumption they so rely on.

Since 2009, we have forecast and documented the unwinding of the Bretton Woods II currency system. Financialisation of our economies and markets, which escalated post-2008 at the instigation of governments and central bankers, is going to go into full reverse for all asset classes. Economies and markets are so entwined that a drop in asset classes will lead the world back into recession. In 2013, we believed the odds had tilted firmly towards increasing debt deflation at the hands of China. Large current account deficits had led to unsustainable debt creation, and as a consequence the trade deficit countries were the first to experience a severe financial crisis. However, on the other side of the equation, the surplus countries were now experiencing their reaction to the crisis.

In November 2013, we wrote: "The deleveraging process which began in 2008 has been a slow burner but is likely now in full swing. The deflationary risks are very high. China is the driver. All eyes on China."

We conceive that this slow-burner of deleveraging, which has occurred since the 2008 crisis, is potentially about to engulf all asset prices. We are beginning to think the unthinkable – that just maybe asset prices will back up 20 to 30% and fast and that through the autumn we could experience even greater price depreciation.

Almost 8 years on from the GFC, the Dow Jones Industrials are perched on the edge of a sharp drop. Will the Ghost of 1937 revisit us eight years on from the Great Crash of 1929, when U.S. stocks and the world economy got roiled all over again? This is already unfolding as we speak. Sean Corrigan's macro analysis in our ‘MidWeek Macro Musings and Money, Macro and Markets’ at HindeSightletters.com has highlighted where the fissures are opening in the global economy and markets. We are posting samples of our work from May to July in this letter to share with you how we began to believe that a global asset crash was at hand.

The Yuan movement may well send more Chinese capital floating across the globe into financial assets and real estate, such as those at Pink Floyd's and London's iconic Battersea Power Station, but it will be short-lived. The debt deleveraging which has been engulfing Emerging Markets has just begun to turn into a ranging inferno, which will eventually burn down all, especially overpriced global assets.

Since the GFC, 'The Great Wall of Money' that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.

*  *  *

The full article is available and ready to download from Hindesight's homepage, or simply click the front cover below for the PDF

In it we discuss the following in a load more detail:

A Probable Trinity - In October 2010, we began our oft repeated narrative about the vulnerability of the Bretton Woods II monetary system in the provocatively entitled letter - 'The World Monetary Earthquake - The Dash from Cash' (The Orient Perspective).


Yuan More Time - Despite PBoC protestations, this Chinese currency move is not a one off event. There will be many more devaluations because, as you will read, FX reserves can abate rapidly. Besides which, we believe the markets have them on the back foot.


Taels from Cathay - As Sean (Corrigan) put it in the July/Aug Money Macro & Markets (MMM): "Wherever you look around the fringes of China—and, by extension, Greater Asia—it is hard to avoid evidence of the woes being suffered.


The Great Wall of Money FALLS - We wrote in a recent Investor Letter: "What is increasingly evident is that market participants are increasingly embroiled in a reflexive relationship between central bank actions, guidance and price action. The more the market moves contrary to central bank desires – i.e. downwards - the more the central bank injects the bubble money and reassures markets with the promise of more infusions of its rich elixir.”


Anglo Saxon APP'mosphere Polluted - A strong dollar currency has created headwinds for the U.S. economy through a range of channels. The latest actions of the Chinese central bank will intensify the negative impact by fostering more dollar appreciation. The U.S. already runs a significant trade deficit with China that will only be exacerbated now. The dollar has already become too restrictive and the global carry trade, which borrowed capital from the East (and lately Europe), was parked in the U.S. and other safe Anglo-Saxon currencies and markets. This capital is very vulnerable.


Chinese Smog Pollutes Albion - The resource sector collapse and the likely end of a 32-year-cycle in 2011 has signalled that these countries are near the end of receiving the foreign capital with which they balance their books. Bar a flurry of Chinese flight capital, housing prices will begin to revert to their mean as the debt deleveraging impulse sends the Chinese smog over Albion and its commonwealth compadres.


ReMeBer Gold? This year, I spoke to RealVision TV and stated that the market was trend-ready in gold and that, as managers of a long-only gold fund, we were trying to be agnostic and position ourselves for a break either way. I did, however, mention that when our models are trend-ready, we often get a false sharp break one way first, only to see a snap back within a few days or weeks.